Maturity Rationing and Collective Short-Termism

Konstantin Milbradt and Martin Oehmke

No 19946, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Financing terms and investment decisions are jointly determined. This interdependence links firms' asset and liability sides and 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 investment opportunities are long-term may change their investments towards 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.

JEL-codes: G11 G30 G31 G32 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-ppm
Note: CF
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Citations: View citations in EconPapers (4)

Published as Maturity Rationing and Collective Short-Termism , Konstantin Milbradt, Martin Oehmke. in New Perspectives on Corporate Capital Structure , Acharya, Almeida, and Baker. 2015
Published as Konstantin Milbradt & Martin Oehmke, 2015. "Maturity rationing and collective short-termism," Journal of Financial Economics, vol 118(3), pages 553-570.

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