A Theory of Multi-Period Debt Structure

67 Pages Posted: 9 Feb 2017 Last revised: 8 Oct 2018

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: October 5, 2018

Abstract

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, Granularity of Debt, Unverifiable Cash Flows

JEL Classification: G30, G32

Suggested Citation

Huang, Chong and Oehmke, Martin and Zhong, Hongda, A Theory of Multi-Period Debt Structure (October 5, 2018). 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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