The Long and the Short of Corporate Debt Maturity: Optimal Term Structure with Independent Creditors

Darst, Matthew; Refayet, Ehraz

doi:10.2139/ssrn.2731751

Cited by 2 publications

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“…The main difference between He and Xiong (2012a) and our setup is that their main source of disagreement is between borrowers (op-timists) and lenders (pessimists) whereas we point at the heterogeneity among lenders in determining the choice of the maturity. More similar to our framework, Darst and Refayet (2016) suggest that positive news induces an increase in short-term relative to long-term debt; this theoretical result is in contrast with the prediction of our model. Because existing theories are unable to match our empirical findings, we build a model that links heterogeneous beliefs among lenders to the borrower's debt maturity structure and predicts that less favorable forecasts generate a maturity shortening, in line with our empirical findings.…”

Section: Introductionsupporting

confidence: 66%

Endogenous Debt Maturity and Rollover Risk

Brancati¹,

Macchiavelli²

2016

FEDS

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Section: Introductionsupporting

confidence: 66%

Endogenous Debt Maturity and Rollover Risk

Brancati¹,

Macchiavelli²

2016

FEDS

View full text Add to dashboard Cite

show abstract

Section: Introductionsupporting

confidence: 66%

Endogenous Debt Maturity and Rollover Risk

Brancati

Macchiavelli²

2016

SSRN Journal

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We challenge the common view that short-term debt, by having to be rolled over continuously, is a risk factor that exposes banks to higher default risk. First, we show that the average effect of expiring obligations on default risk is insignificant; it is only when a bank has limited access to new funds that maturing debt has a detrimental impact on default risk. Next, we show that both limited access to new funds and shorter maturities are causally determined by deteriorating market expectations about the bank's future profitability. In other words, short-term debt is not a cause of fragility but the result of creditors losing faith in the long-run prospects of the bank, hence forcing it to shorten its debt maturity. Finally, we build a model that endogenizes the debt maturity structure and predicts that worse market expectations lead to a maturity shortening.JEL classification: G01, G21, G32.We are greatly indebted to Eyal Dvir for his invaluable guidance during the early stages of the project. We are also grateful to Review 102, 88-94. He, Zhiguo, and Wei Xiong, 2012b, Dynamic debt runs, Review of Financial Studies 25, 1799-1843. He, Zhiguo, and Wei Xiong, 2012c, Rollover risk and credit risk, Journal of Finance 67, 391-430. Hu, Xing, 2010, Rollover risk and credit spreads in the financial crisis of 2008, Princeton University Working Paper . Johnson, Shane, 2003, Debt maturity and the effects of growth opportunities and liquidity risk on leverage, Review of Financial Studies 16, 209-236.

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The Long and the Short of Corporate Debt Maturity: Optimal Term Structure with Independent Creditors

Cited by 2 publications

References 55 publications

Endogenous Debt Maturity and Rollover Risk

Endogenous Debt Maturity and Rollover Risk

Endogenous Debt Maturity and Rollover Risk

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