Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads

Hui Chen (), Yu Xu and Jun Yang

No 18367, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We build a dynamic capital structure model to study the link between firms' systematic risk exposures and their time-varying debt maturity choices, as well as its implications for the term structure of credit spreads. Compared to short-term debt, long-term debt helps reduce rollover risks, but its illiquidity raises the costs of financing. With both default risk and liquidity costs changing over the business cycle, our calibrated model implies that debt maturity is pro-cyclical, firms with high systematic risk favor longer debt maturity, and that these firms will have more stable maturity structures over the cycle. Moreover, pro-cyclical maturity variation can significantly amplify the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high beta, high leverage, or a lumpy maturity structure. We provide empirical evidence for the model predictions on both debt maturity and credit spreads.

JEL-codes: E32 G32 G33 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-ban, nep-mac and nep-rmg
Note: AP CF
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Citations: View citations in EconPapers (26)

Published as Hui Chen & Yu Xu & Jun Yang, 2020. "Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads," Journal of Financial Economics, .

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Working Paper: Systematic Risk, Debt Maturity and the Term Structure of Credit Spreads (2012)
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