Working Paper

Debt Maturity and Commitment on Firm Policies

Abstract: If firms can issue debt only at discrete dates, debt maturity is an effective device against the commitment problem on debt and investment policies. With shorter maturities, debt dynamics are less persistent and more valuable because upward leverage adjustments are faster and long-run leverage lower. Debt maturities that are relatively shorter than asset maturities increase marginal q, and reduce underinvestment. A decomposition of the credit spread consistent with equilibrium shows that the component due to the commitment problem on future debt issuances is sizeable when leverage and default risk are low, and is lower for shorter maturity.

Keywords: credit risk; debt-equity agency conflicts; leverage ratchet effect; financial contracting; debt maturity;

JEL Classification: G12; G31; G32; E22;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2023-04-19

Number: 2303