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

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.