Abstract

http://ssrn.com/abstract=1539650
 
 

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


Douglas W. Diamond


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Zhiguo He


University of Chicago - Booth School of Business, and NBER

May 6, 2012

AFA 2011 Denver Meetings Paper
Chicago Booth Research Paper No. 12-31
Fama-Miller Working Paper

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.

Number of Pages in PDF File: 48

Keywords: Wealth transfer, short-term debt crisis, underinvestment, endogenous default

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Date posted: January 22, 2010 ; Last revised: August 22, 2012

Suggested Citation

Diamond, Douglas W. and He, Zhiguo, A Theory of Debt Maturity: The Long and Short of Debt Overhang (May 6, 2012). AFA 2011 Denver Meetings Paper; Chicago Booth Research Paper No. 12-31; Fama-Miller Working Paper . Available at SSRN: http://ssrn.com/abstract=1539650 or http://dx.doi.org/10.2139/ssrn.1539650

Contact Information

Douglas W. Diamond
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7283 (Phone)
HOME PAGE: http://faculty.chicagobooth.edu/douglas.diamond/

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National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Zhiguo He (Contact Author)
University of Chicago - Booth School of Business, and NBER ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

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