Corporate debt maturity and stock price crash risk

Viet Dang, Edward Lee, Yangke Liu and Cheng Zeng

European Financial Management, 2018, vol. 24, issue 3, 451-484

Abstract: We find that firms with a larger proportion of short‐term debt have lower future stock price crash risk, consistent with short‐term debt lenders playing an effective monitoring role in constraining managers’ bad‐news‐hoarding behaviour. The inverse relationship between short‐maturity debt and future crash risk is more pronounced for firms that are harder to monitor due to weaker corporate governance, higher information asymmetry, and greater risk‐taking. These findings suggest that short‐term debt substitutes for other monitoring mechanisms in curbing managerial opportunism and reducing future crash risk. Our study implies that short‐maturity debt not only preserves creditors’ interests, but also protects shareholders’ wealth.

Date: 2018
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