Do Firms Borrow at the Lowest-Cost Maturity? The Long-Term Share in Debt Issues and Predictable Variation in Bond Returns

45 Pages Posted: 3 Nov 2008

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: November 2001

Abstract

We document that firms tend to borrow at the lowest-cost maturity. In aggregate timeseries data, the share of long-term debt issues in total debt issues is negatively related to subsequent excess bond returns, meaning that firms substitute toward long-term debt when the cost of long-term debt is low relative to the cost of short-term debt. The longterm share is also contemporaneously negatively related to the components of the longterm interest rate that predict higher excess bond returns, including inflation, the real short-term rate, and the term spread. The results suggest that firms use predictable variation in excess bond returns in an effort to reduce the cost of capital.

Suggested Citation

Baker, Malcolm P. and Greenwood, Robin M. and Wurgler, Jeffrey A., Do Firms Borrow at the Lowest-Cost Maturity? The Long-Term Share in Debt Issues and Predictable Variation in Bond Returns (November 2001). NYU Working Paper No. FIN-01-020. Available at SSRN: https://ssrn.com/abstract=1294486

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robin M. Greenwood

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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