A Theory of Debt Maturity: The Long and Short of Debt Overhang

Douglas Diamond and Zhiguo He ()

No 18160, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Debt maturity influences debt overhang: the reduced incentive for highly- levered borrowers to make real investments because some value accrues to debt. Reducing maturity can increase or decrease overhang even when shorter-term debt's value depends less on firm value. Future overhang is more volatile for shorter-term debt, making future investment incentives volatile and influencing immediate investment incentives. With immediate investment, shorter-term debt typically imposes lower overhang; longer-term debt can impose less if firm value is more volatile in bad times. For future investments, reduced correlation between the value of assets-in-place and profitability of investment increases the overhang of shorter-term debt.

JEL-codes: G32 (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-bec
Note: CF
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Citations: View citations in EconPapers (12)

Published as Douglas W. Diamond & Zhiguo He, 2014. "A Theory of Debt Maturity: The Long and Short of Debt Overhang," Journal of Finance, American Finance Association, vol. 69(2), pages 719-762, 04.

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Journal Article: A Theory of Debt Maturity: The Long and Short of Debt Overhang (2014)
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