Debt maturity and the dynamics of leverage

Thomas Dangl and Josef Zechner

No 547, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: This paper shows that long debt maturities eliminate equityholders' incentives to reduce leverage when the firm performs poorly. By contrast, short debt maturities commit equityholders to such leverage reductions. However, shorter debt maturities also lead to higher transactions costs when maturing bonds must be refinanced. We show that this tradeoff between higher expected transactions costs against the commitment to reduce leverage when the firm is doing poorly motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt.

Keywords: debt maturity; optimal capital structure choice (search for similar items in EconPapers)
JEL-codes: G3 G32 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cfn, nep-mic and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/147144/1/871015935.pdf (application/pdf)

Related works:
Journal Article: Debt Maturity and the Dynamics of Leverage (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:547

Access Statistics for this paper

More papers in CFS Working Paper Series from Center for Financial Studies (CFS) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().