Debt Maturity and the Dynamics of Leverage

52 Pages Posted: 25 Oct 2016 Last revised: 11 Jan 2018

See all articles by Thomas Dangl

Thomas Dangl

Vienna University of Technology

Josef Zechner

Vienna University of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 15, 2016

Abstract

This paper shows that long debt maturities eliminate equity holders’ incentives to reduce leverage when the firm performs poorly. By contrast, short debt maturities commit equity holders to such leverage reductions. However, shorter debt maturities also lead to higher transactions costs when maturing bonds must be refinanced. We show that this tradeoff between higher expected transactions costs against the commitment to reduce leverage when the firm is doing poorly motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt.

Keywords: debt maturity, optimal capital structure choice

JEL Classification: G3, G32

Suggested Citation

Dangl, Thomas and Zechner, Josef, Debt Maturity and the Dynamics of Leverage (June 15, 2016). CFS Working Paper, No. 547. Available at SSRN: https://ssrn.com/abstract=2858756 or http://dx.doi.org/10.2139/ssrn.2858756

Thomas Dangl

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
Austria

Josef Zechner (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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