Endogenous Debt Maturity: Liquidity Risk vs. Default Risk

Rodolfo Manuelli and Juan Sanchez

No 1103, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study the endogenous determination of debt maturity in a setting with default risk. Firms have access to a bond with a flexible structure. The optimal bond maturity balances liquidity risk and default risk. Firms with poor prospects and firms in more unstable industries will choose shorter maturities even if it is feasible to issue longer debt. The model also offers predictions on how asset maturity, asset salability, and leverage influence maturity. Even though our model is extremely stylized, predictions are roughly consistent with the evidence. Moreover, it o¤ers some insights into the factors that determine the structure of debt.

Date: 2019
New Economics Papers: this item is included in nep-cfn, nep-dge and nep-rmg
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Related works:
Working Paper: Endogenous Debt Maturity: Liquidity Risk vs. Default Risk (2018)
Working Paper: Endogenous Debt Maturity: Liquidity Risk vs. Default Risk (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1103

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