Granularity of Corporate Debt

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in CFS Working Paper SeriesThe Center for Financial Studies, located in Goethe University's House of Finance in Frankfurt, is an independent non-profit research center, funded by the non-profit-making organisation Gesellschaft für Kapitalmarktforschung e.V. (GfK). The CFS is financed by donations and by contributions of the GfK members, as well as by national and international research grants. The GfK members comprise major players in Ger-many's financial industry. Established in 1967 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas.The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. AbstractWe study to what extent firms spread out their debt maturity dates across time, which we call "granularity of corporate debt." We consider the role of debt granularity using a simple model in which a firm's inability to roll over expiring debt causes inefficiencies, such as costly asset sales or underinvestment. Since multiple small asset sales are less costly than a single large one, firms may diversify debt rollovers across maturity dates. We construct granularity measures using data on corporate bond issuers for the 1991-2011 period and establish a number of novel findings. First, there is substantial variation in granularity in that many firms have either very concentrated or highly dispersed maturity structures. Second, our model's predictions are consistent with observed variation in granularity. Corporate debt maturities are more dispersed for larger and more mature firms, for firms with better investment opportunities, with higher leverage ratios, and with lower levels of current cash flows. We also show that during the recent financial crisis especially firms with valuable investment opportunities implemented more dispersed maturity structures. Finally, granularity plays an important role for bond issuances, because we document that newly issued corporate bond maturities complement pre-existing bond maturity profiles. JEL Classification Numbers: G13, G31, G32, G33.

The evolution of debt policies: New evidence from business startups

“…Moreover, we lack evidence as to whether findings on the dynamics of leverage have implications for a broader range of debt policies, including debt specialization (Colla, Ippolito and Li, 2013), debt maturity (Scherr and Hulburt, 2001) and debt granularity (Choi, Hackbarth and Zechner, 2014). In sum, an investigation of the evolution of entrepreneurial firms' debt policies going back to startup is timely.…”

Diffusing Coordination Risk

“…Based on our theory, if the borrower can adjust the debt structure, she would adopt a more diffused debt structure in facing this shock. Choi et al (2014) provides empirical evidence to support this idea. They found that right before the financial crisis financial institutions adopted more diffused term structures.…”

“…But the option is restrictive in the sense that it is open at a certain point of time. We argue that this mechanism is feasible to avoid self-fulfilling runs because there is empirical evidence the granularity of corporate debts has a lot of variation across firms and across time, see Choi et al (2014). It tells that financial firms could issue debt with different maturities for their long-term investment.…”

“…Although agents are facing less strategic uncertainty from agents who have been approached at the same time, they have a dynamic concern about what agents will do in future. Choi et al (2014) show that corporate bond issuers are usuing similar policies through diversification of debt rollovers across maturity dates. Hedge fund managers also set redemption gate, which limits the amount of withdrawals from the fund during a redemption period.…”

“…For instance, there might be some issuance cost for each type of debt. One can interpret the cost of diffusing debt structure as the illiquidity discount, since more debt issues with smaller sizes will have a less liquid secondary market than few debt issues with larger sizes(Choi et al, 2014).…”