We study a novel aspect of a firm’s capital structure, namely, the profile of its debt maturity dates. In a simple theoretical framework we show that the dispersion of debt maturities constitutes an important dimension of capital structure choice, driven by firm characteristics and debt rollover risk. Guided by these predictions we establish two main empirical results. First, using an exogenous shock to rollover risk, we document a significant increase in maturity dispersion for firms that need to roll over maturing debt. Second, we find strong support that maturities of newly issued debt are influenced by pre-existing maturity profiles.

We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions “liquidity mergers,” since their purpose is to reallocate liquidity to firms that are otherwise inefficiently terminated. We show that liquidity mergers are more likely to occur when industry-level asset-specificity is high and firm-level asset-specificity is low. We analyze firms' liquidity policies as a function of real asset reallocation, examining the trade-offs between cash and credit lines. We verify the model's prediction that liquidity mergers are more likely to occur in industries in which assets are industry-specific, but transferable across firms. We also show that firms are more likely to use credit lines (relative to cash) in industries in which liquidity mergers are more frequent.

We document that (i) debt-to-equity ratios and levered equity betas negatively covary with the market risk premium in distressed firms; (ii) the negative covariance generates negative alphas among those firms. We build a dynamic credit risk model to understand the negative covariance between equity betas and the market risk premium, via endogenous and dynamic debt financing over the business cycles. Because of endogenous debt financing and distress, our model naturally connects the negative failure probability-return relation to the positive distress risk premium-return relation.

We examine the optimal mixture and priority structure of bank and market debt using a trade-off model in which banks have the unique ability to renegotiate outside formal bankruptcy. Flexible bank debt offers a superior trade-off between tax shields and bankruptcy costs. Ease of renegotiation limits bank debt capacity, however. Optimal debt structure hinges upon which party has bargaining power in private workouts. Weak firms have high bank debt capacity and utilize bank debt exclusively. Strong firms lever up to their (lower) bank debt capacity, augment with market debt, and place the bank senior. Therefore, the trade-off theory offers an explanation for: (i) why young/small firms use bank debt exclusively; (ii) why large/mature firms employ mixed debt financing; and (iii) why bank debt is senior. The trade-off theory also generates predictions consistent with international evidence. In countries in which the bankruptcy regime entails soft (tough) enforcement of contractual priority, bank debt capacity is low (high), implying greater (less) reliance on market debt.