Optimal Debt Maturity and Firm Investment

Joachim Jungherr and Immo Schott

Review of Economic Dynamics, 2021, vol. 42, 110-132

Abstract: We introduce long-term debt and a maturity choice into a dynamic model of production, firm financing, and costly default. Long-term debt saves roll-over costs but increases future leverage and default rates because of a commitment problem. The model generates rich distributions of maturity choices, leverage ratios, and credit spreads across firms. It explains why larger and older firms borrow at longer maturities, have higher leverage, and pay lower credit spreads. Firms' maturity choice matters for policy: A financial reform which increases investment and output in a standard model of short-term debt can have the opposite effect in a model with short-term debt and long-term debt. (Copyright: Elsevier)

Keywords: Firm dynamics; Firm financing; Debt maturity; Default (search for similar items in EconPapers)
JEL-codes: E22 E44 G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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DOI: 10.1016/j.red.2020.10.005

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