Managerial Myopia and Debt Maturity

Abstract

We argue that firms with relatively shorter term debt face higher managerial myopia. Because shorter term debt is less sensitive to the firm's long-term performance, short-term debtholders have less incentive to monitor the firm management regarding myopic investments. Myopic versus long-term investments affect the value of the firm differently at different horizons, and ultimately the firm's short-term and long-term equity returns. We use a generated instrumental variables approach to distinguish the fraction of debt maturity reduction due to investor preference and not firm preference. Ceteris paribus, at the mean issuance debt maturity of almost 10 years, we find that for a one year reduction in debt maturity due to investor preference, five-year equity returns fall by about 2.1% per annum. The benefits of monitoring by debtholders can be quite significant for equityholders.

Keywords: Debt maturity, Managerial myopia, Underwriters

JEL Classification: G32, G34