Debt Maturity and Lumpy Debt

Abstract

I develop a dynamic capital structure model in which shareholders determine a firm's leverage ratio, debt maturity, and default strategy. In my model, the firm's debt matures all at once. Therefore, after repaying the principal shareholders own all the firm's cash flows and can pick a new capital structure. The possibility to alter the capital structure at maturity gives shareholders the incentive to issue finite maturity debt and allows me to study firms' joint choice of leverage and debt maturity. I also extend my model by allowing for time-varying capital supply to study time-variation in firms' joint choice of leverage and debt maturity.

Keywords: debt maturity, capital structure, default

JEL Classification: G32, G33, G34