A Theory of Multiperiod Debt Structure

69 Pages Posted: 9 Feb 2017 Last revised: 1 Mar 2019

See all articles by Chong Huang

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: February 25, 2019

Abstract

We develop a theory of multiperiod debt structure. A simple trade-off between the termination threat required to make debt repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and 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 limits the number of risky repayments. Firms with significant risk-free cash-flow component choose dispersed maturity profiles with smaller, 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, G33

Suggested Citation

Huang, Chong and Oehmke, Martin and Zhong, Hongda, A Theory of Multiperiod Debt Structure (February 25, 2019). 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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