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Debt Maturity and the Liquidity of Secondary Debt Markets

Max Bruche and Anatoli Segura ()

FMG Discussion Papers from Financial Markets Group

Abstract: We develop an equilibrium model of debt maturity choice of rms, in the presence of xed issuance costs in primary debt markets, and an over-the-counter secondary debt market with search frictions. Liquidity in this market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of debtholders who sell in the secondary market and hence reduce the interest rate that rms need to o er on debt. Long maturities reduce re-issuance costs. The optimally chosen maturity trades o both considerations. Firms individually do not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other rms. As a result, the laissez-faire equilibrium exhibits ineciently short maturity choices. Empirical implications of the model include that issuance yields and bid-ask spreads should be increasing in maturity.

Date: 2013
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Related works:
Journal Article: Debt maturity and the liquidity of secondary debt markets (2017) Downloads
Working Paper: Debt maturity and the liquidity of secondary debt markets (2016) Downloads
Working Paper: Debt Maturity and the Liquidity of Secondary Debt Markets (2013) Downloads
Working Paper: Debt maturity and the liquidity of secondary debt markets (2013) Downloads
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