Liquidity Risk, and Maturity Management over the Credit Cycle
Atif R. Mian
Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER
João A. C. Santos
Federal Reserve Bank of New York; New University of Lisbon - Nova School of Business and Economics
May 15, 2011
We use the Shared National Credit data on syndicate loans to investigate U.S. firms’ refinancing behavior over the last two decades. As credit conditions tighten, refinancing likelihood goes down and draw down on loan commitments increases sharply. Surprisingly, refinancing propensity is most sensitive to credit market conditions for credit worthy firms. We show that this is a result of active maturity management by credit worthy firms to avoid being exposed to liquidity risk. Credit worthy firms refinance early at a significantly higher rate when credit conditions are good in order to keep the effective maturity of their loans long. They can then afford to refinance at a lower rate when credit conditions tighten. We show that these results are driven by variation in credit market conditions and not business cycle fluctuation.
Number of Pages in PDF File: 49
Keywords: Refinance, liquidity risk, maturity management
JEL Classification: G21, G32working papers series
Date posted: March 17, 2012 ; Last revised: April 14, 2013
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