Maturity rationing and collective short-termism

Konstantin Milbradt*, Martin Oehmke

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

Abstract

Financing terms and investment decisions are jointly determined. This interdependence, which links firms asset and liability sides, can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investments are long-term may adopt second-best projects of shorter maturities. This worsens financing terms for firms with shorter-maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

Original languageEnglish (US)
Pages (from-to)553-570
Number of pages18
JournalJournal of Financial Economics
Volume118
Issue number3
DOIs
StatePublished - Dec 2015

Keywords

  • Asset maturity
  • Asymmetric information
  • Credit rationing
  • Cross-firm externality
  • Short-termism

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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