Systematic risk, debt maturity, and the term structure of credit spreads

Hui Chen, Yu Xu and Jun Yang

Journal of Financial Economics, 2021, vol. 139, issue 3, 770-799

Abstract: We document several facts about corporate debt maturity: (1) debt maturity is pro-cyclical, (2) higher-beta firms tend to have longer maturity, and (3) shorter maturity amplifies the sensitivity of credit spreads to aggregate shocks. We present a dynamic capital structure model that explains these facts. In the model, leverage and maturity choices are interdependent, which reflect the tradeoffs of liquidity discounts of long-term debt, repayment risks of short-term debt, and the benefit of short-term debt as a commitment device for timely leverage adjustments. Additionally, the model helps quantify the effects of maturity dynamics on the term structure of credit spreads.

Keywords: Credit risk; Term structure; Business cycle; Maturity dynamics; Liquidity (search for similar items in EconPapers)
JEL-codes: E32 G12 G32 G33 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:139:y:2021:i:3:p:770-799

DOI: 10.1016/j.jfineco.2020.09.002

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