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Journal of Financial Economics Vol. 154 2024

Asset life, leverage, and debt maturity matching

Thomas Geelen1,2; Jakub Hajda3; Erwan Morellec4,5,6; Adam Winegar7

1 Danish National Research Foundation · 2 Copenhagen Business School · 3 HEC Montréal · 4 École Polytechnique Fédérale de Lausanne · 5 Swiss Finance Institute · 6 Centre for Economic Policy Research · 7 BI Norwegian Business School

open access

Abstract

Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.

DOI
10.1016/j.jfineco.2024.103796
Volume
154
Pages
103796
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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