Maturity Rationing and Collective Short-Termism

51 Pages Posted: 3 Mar 2014

Multiple version iconThere are 2 versions of this paper

Date Written: February 2014

Abstract

Financing terms and investment decisions are jointly determined. This interdependence links firms' asset and liability sides and can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investment opportunities are long-term may change their investments towards second-best projects of shorter maturities. This worsens financing terms for firms with shorter maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

Suggested Citation

Milbradt, Konstantin and Oehmke, Martin, Maturity Rationing and Collective Short-Termism (February 2014). NBER Working Paper No. w19946. Available at SSRN: https://ssrn.com/abstract=2403670

Konstantin Milbradt (Contact Author)

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

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