Journal of Financial Economics Vol. 118 No. 3 2015
Maturity rationing and collective short-termism
Abstract
Financing terms and investment decisions are jointly determined. This interdependence, which links firms׳ asset and liability sides, can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investments are long-term may adopt second-best projects of shorter maturities. This worsens financing terms for firms with shorter-maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.
- DOI
- 10.1016/j.jfineco.2014.08.009
- Volume
- 118
- Issue
- 3
- Pages
- 553-570
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref