A Theory of Multi-Period Debt Structure

59 Pages Posted: 9 Feb 2017 Last revised: 29 Sep 2017

Chong Huang

University of California, Irvine - Paul Merage School of Business

Martin Oehmke

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

Hongda Zhong

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

Date Written: May 31, 2017

Abstract

We develop a model of multi-period debt structure. A simple trade-off between the termination threat required to make repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and repayment amounts. For mature firms with risky cash flows, frequent repayments maximize pledgeable income—for example, by rolling over short-term debt. In contrast, for firms with cash-flow growth or significant risk-free cash flows, adding risky repayments can decrease pledgeable income. In some cases, a single risky bullet repayment maximizes pledgeable income, effectively a long-term debt contract.

Keywords: Debt Structure, Debt Maturity, Corporate Debt Maturity Profiles, Unverifiable Cash Flows, Rollover Risk

Suggested Citation

Huang, Chong and Oehmke, Martin and Zhong, Hongda, A Theory of Multi-Period Debt Structure (May 31, 2017). Columbia Business School Research Paper No. 17-22; HKUST Finance Symposium 2017. Available at SSRN: https://ssrn.com/abstract=2913908 or http://dx.doi.org/10.2139/ssrn.2913908

Chong Huang

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Martin Oehmke

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

United Kingdom

Hongda Zhong (Contact Author)

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

United Kingdom

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