Dynamic Debt Maturity

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

A firm chooses its debt maturity structure and default timing dynamically, both without commitment. Via the fraction of newly issued short-term bonds, equity holders control the maturity structure, which affects their endogenous default decision. A shortening equilibrium with accelerated default emerges when cash flows deteriorate over time so that debt recovery is higher if default occurs earlier. Self-enforcing shortening and lengthening equilibria may coexist, with the latter possibly Pareto dominating the former. The inability to commit to issuance policies can worsen the Leland problem of the inability to commit to a default policy-a self-fulfilling shortening spiral and adverse default policy may arise.

Original languageEnglish (US)
Pages (from-to)2677-2736
Number of pages60
JournalReview of Financial Studies
Volume29
Issue number10
DOIs
StatePublished - Oct 1 2016

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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