Maturity rationing and collective short-termism

Konstantin Milbradt and Martin Oehmke

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Financing terms and investment decisions are jointly determined. This interdependence, which links firms׳ asset and liability sides, can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investments are long-term may adopt second-best projects of shorter maturities. This worsens financing terms for firms with shorter-maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

Keywords: short-terminism; asset maturity; credit rationing; asymmetric information; cross-firm externality (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2015-12-01
New Economics Papers: this item is included in nep-ppm
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Citations: View citations in EconPapers (11)

Published in Journal of Financial Economics, 1, December, 2015, 118(3), pp. 553 - 570. ISSN: 0304-405X

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