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Liquidity Risk, and Maturity Management over the Credit Cycle

49 Pages Posted: 17 Mar 2012 Last revised: 14 Apr 2013

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

Date Written: May 15, 2011

Abstract

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.

Keywords: Refinance, liquidity risk, maturity management

JEL Classification: G21, G32

Suggested Citation

Mian, Atif R. and Santos, João A. C., Liquidity Risk, and Maturity Management over the Credit Cycle (May 15, 2011). Available at SSRN: https://ssrn.com/abstract=2023516 or http://dx.doi.org/10.2139/ssrn.2023516

Atif R. Mian

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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