Endogenous Debt Maturity: Liquidity Risk vs. Default Risk

Juan Sanchez and Rodolfo Manuelli

No 1435, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study the joint determination of a technology ---the degree of illiquidity of a project, its mean growth rate and the variability of the growth rate--- — and the optimal debt …financing ---the face value of the debt, its coupon rate, and expected maturity—--- in an economy in which credit markets and decision makers are risk neutral and have the same discount rate. Our results show that the optimal maturity of the debt balances the risk of default due to illiquidity with the risk of strategic default. In a quantitative exercise we show how the optimal structure of debt varies with technological and environmental parameters. We …find that when output is low (and, hence, the probability of default is high) …firms choose to issue short term debt. In general, there is a positive relationship between output and maturity. We also fi…nd … that firms operating in more uncertain environments choose to issue shorter debt, while fi…rms whose assets have higher resale value (e.g. face lower costs of …re sales) issue longer maturity debt.

Date: 2016
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2016/paper_1435.pdf (application/pdf)

Related works:
Working Paper: Endogenous Debt Maturity: Liquidity Risk vs. Default Risk (2019)
Working Paper: Endogenous Debt Maturity: Liquidity Risk vs. Default Risk (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1435

Access Statistics for this paper

More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann (chuichuiche@gmail.com).