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Risk aversion and debt maturity structure

Jorge Fernández-Ruiz and Blanca Cecilia García Medina
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Blanca Cecilia García Medina: El Colegio de México

Economía Mexicana NUEVA ÉPOCA, 2003, vol. XII, issue 2, 275-291

Abstract: We study the relationship of risk aversion and debt maturity structure. In a model in which adverse selection in financial markets creates a role for the use of short-term debt, we allow the possibility of borrowers being risk-averse. This creates a trade-off between reduced expected financing costs and higher risk and allows for the study of the effect of risk aversion on optimal maturity structure. We prove that, as risk aversion increases, so does the percentage of debt that is long-term.

Keywords: risk aversion; debt maturity structure; adverse selection. (search for similar items in EconPapers)
Date: 2003
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