Debt Maturity and Commitment on Firm Policies

Andrea Gamba and Alessio Saretto

No 2303, Working Papers from Federal Reserve Bank of Dallas

Abstract: When firms can trade debt only at discrete dates, debt maturity becomes an effective tool to discipline investment and debt policies. In the absence of other frictions, single-period debt restores first-best investment. With market freezes, long-maturity debt amplifies underinvestment and the leverage ratchet effect, while short maturity mitigates these distortions. Calibrating the model to U.S. non-financial firms shows that choosing the optimal debt maturity can reduce the cost of commitment problems and market frictions by up to 4% of firm value. A decomposition of the equilibrium credit spread reveals that the agency component associated with time-inconsistent debt and investment policies is largest when leverage and default risk are low, and is substantially reduced by shorter debt maturities.

Keywords: investment; credit risk; debt-equity agency conflicts; leverage ratchet effect; financial contracting; debt maturity (search for similar items in EconPapers)
JEL-codes: E22 G12 G31 G32 (search for similar items in EconPapers)
Pages: 52
Date: 2023-04-19, Revised 2026-03-04
New Economics Papers: this item is included in nep-cfn and nep-des
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DOI: 10.24149/wp2303r2

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