A Theory of Multi-Period Debt Structure
59 Pages Posted: 9 Feb 2017 Last revised: 29 Sep 2017
Date Written: May 31, 2017
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
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