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Policy uncertainty and the maturity structure of corporate debt

Sudip Datta, Trang Doan and Mai Iskandar-Datta

Journal of Financial Stability, 2019, vol. 44, issue C

Abstract: This study examines the effect of policy uncertainty on corporate debt maturity structure. We find that elevated levels of policy uncertainty lead firms to shorten debt maturity, indicating that firms become more cautious to committing to long-term debt obligations and is suggestive of increased risk aversion during high policy uncertainty periods. However, not all firms react similarly. In contrast to Myers' (1977) prediction, high growth firms lengthen debt maturity during high policy uncertainty periods. The evidence regarding the relationship between debt maturity and credit quality is not non-monotonic as firms with highest and lowest credit quality diverge in terms of debt maturity when policy uncertainty is elevated. Further, larger firms increase their debt maturity, while financially-constrained firms and firms with greater exposure to domicile political environment obtain short-term debt. The results are robust to a battery of tests including the use of instrument variable and placebo analysis.

Keywords: Policy uncertainty; Debt maturity choice; Domicile political exposure; Financial constraints (search for similar items in EconPapers)
JEL-codes: G32 G38 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:44:y:2019:i:c:s1572308918305321

DOI: 10.1016/j.jfs.2019.100694

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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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