The Advantage of Multiple Maturity Borrowing
Posted: 1 Aug 2009
Date Written: July 31, 2009
In the project proposed here, we intend to study how firms choose the maturity structure of their debt. We argue that because of lower information-gathering and monitoring costs, institutional investors would prefer to invest in firms with bonds outstanding across multiple maturities. We hypothesize that this preference of institutional investors for firms with bonds of multiple maturities should generate excess demand for these bonds, and should ultimately result in lower bond yields in the primary as well as secondary bond markets. Conditional on the presence of these benefits, the firms would try to respond by issuing bonds across the spectrum of maturities. In other words, if a firm already has bonds outstanding in a particularly maturity-niche, then it would issue bonds in a different maturity-niche in order to cover a wider spectrum of maturities, and especially so if its competitors have already issued bonds across multiple maturities. We propose to further analyze the preference of investors for multiple-maturity issuance under a specific scenario – when portfolio concentration is risky. Under such a scenario, e.g. after the downgrade of GM and Ford bonds in 2005, we would expect portfolio concentration to be risky and thus the appetite of institutional investors for multiple-maturity issuance to be diminished. This provides a natural experiment to test whether the firms that issue bonds across multiple maturities pay a lower yield in comparison with the firms that do not. The objective of this project is twofold. One, understanding these pricing implications of multiple-maturity issuance is particularly important for fund managers. And two, this project will enhance our understanding of debt maturity structure and throw new light on the topic by introducing the supply side of the story.
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