Asset life, leverage, and debt maturity matching

Thomas Geelen, Jakub Hajda, Erwan Morellec and Adam Winegar

Journal of Financial Economics, 2024, vol. 154, issue C

Abstract: Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.

Keywords: Capital age; Asset life; Maturity matching; Debt cycles; Maturity cycles (search for similar items in EconPapers)
JEL-codes: E32 G31 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:154:y:2024:i:c:s0304405x24000199

DOI: 10.1016/j.jfineco.2024.103796

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