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Debt Maturity Management

Yunzhi Hu¹; Felipe Varas²; Chao Ying³

¹ Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina, USA The School of Business and Management is the business school of the Hong Kong University of Science and Technology, Hong Kong · ² Naveen Jindal School of Management, University of Texas at Dallas · ³ CUHK Business School

Abstract This paper studies how a borrower issues long- and short-term debt in response to shocks to the fundamental value. Short-term debt protects creditors from future dilution and incentivizes the borrower to reduce leverage after small negative shocks. Long-term debt postpones default and allows the borrower time to recover after large negative shocks. When borrowers are in distress, they rely on short-term debt; however, they issue both types of debt during more normal periods. Our model generates novel implications for the dynamic adjustment of debt maturities.

DOI

10.1093/rfs/hhag007

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en

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