Maturity rationing and collective short-termism

Konstantin Milbradt and Martin Oehmke

Journal of Financial Economics, 2015, vol. 118, issue 3, 553-570

Abstract: Financing terms and investment decisions are jointly determined. This interdependence, which links firms׳ asset and liability sides, 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 investments are long-term may adopt 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.

Keywords: Short-termism; Asset maturity; Credit rationing; Asymmetric information; Cross-firm externality (search for similar items in EconPapers)
JEL-codes: G11 G30 G31 G32 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:118:y:2015:i:3:p:553-570

DOI: 10.1016/j.jfineco.2014.08.009

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