The Joint Determination of Leverage and Maturity

Abstract

We examine theories of leverage and debt maturity, focusing on the impact of a firm's investment opportunity set and regulatory environment in determining these policies. Using results on strategic complementarities, we identify sufficient conditions for the theory to have testable implications for reduced-form and structural-equation regression coefficients. Obtaining testable implications for structural-equation regression coefficients requires less from the theory but more from the data than the reduced-form specification since it requires an instrumental-variables approach. Thus, we highlight tradeoffs between theory and statistical methods. We provide tests using two decades of data for over 5,000 industrial firms.