The maturity premium
Patrick Weiss and
Journal of Financial Economics, 2022, vol. 144, issue 2, 670-694
We show that firms with longer debt maturities earn risk premia not explained by unconditional factors. Embedding dynamic capital structure choices in an asset-pricing framework where the market price of risk evolves with the business cycle, we find that firms with long-term debt exhibit more countercyclical leverage. The induced covariance between betas and the market price of risk generates a maturity premium similar in size to our empirical estimate of 0.21% per month. We also provide direct evidence for the model mechanism and confirm that the maturity premium is consistent with observed leverage dynamics of long- and short-maturity firms.
Keywords: Maturity; Value premium; Debt overhang; Cross-section of stock returns; CAPM (search for similar items in EconPapers)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:144:y:2022:i:2:p:670-694
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