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Debt Maturity and the Liquidity of Secondary Debt Markets

45 Pages Posted: 16 Feb 2013 Last revised: 11 May 2017

Max Bruche

Cass Business School, City University London; Financial Markets Group (LSE)

Anatoli Segura

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2016

Abstract

We model the debt maturity choice of firms in the presence of fixed issuance costs in the primary market and search frictions in the secondary market for debt. In the secondary market, short maturities improve the bargaining position of sellers, which reduces the required issuance yield. Long maturities reduce reissuance costs. The optimally chosen maturity trades off both considerations. Equilibrium exhibits inefficiently short maturity choices: An individual firm does not internalize that a longer maturity increases expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms.

Keywords: debt maturity, search, liquidity

JEL Classification: G12, G32

Suggested Citation

Bruche, Max and Segura, Anatoli, Debt Maturity and the Liquidity of Secondary Debt Markets (June 1, 2016). Journal of Financial Economics (JFE), Vol. 124, No. 3, 2017. Available at SSRN: https://ssrn.com/abstract=2218698 or http://dx.doi.org/10.2139/ssrn.2218698

Max Bruche (Contact Author)

Cass Business School, City University London ( email )

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HOME PAGE: http://www.maxbruche.net

Financial Markets Group (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Anatoli Segura

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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