A Theory of Multi-Period Debt Structure
64 Pages Posted: 9 Feb 2017 Last revised: 4 Jul 2018
Date Written: July 3, 2018
We develop a theory 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. As firms increase their borrowing, they add periodic risky repayments from the back of the maturity structure, with the time between repayments increasing in cash-flow risk. Cash-flow growth or a significant risk-free cash-flow component limit the number of periodic risky repayments. Firms with significant risk-free cash-flow component choose dispersed maturity profiles with relatively safe repayments every period, rather than riskier, periodic repayments.
Keywords: Debt Structure, Debt Maturity, Corporate Debt Maturity Profiles, Unverifiable Cash Flows, Rollover Risk
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