The Long-term Use of Short-term Debt around the World

59 Pages Posted: 25 Jan 2018 Last revised: 2 Jun 2019

See all articles by Lifang Chen

Lifang Chen

Xiamen National Accounting Institute

Yong Li

University of International Business and Economics (UIBE)

Yizhong Wang

Zhejiang University - College of Economics

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: May 30, 2019

Abstract

We propose novel proxies to identify firms that use short-term debt to fund long-term investment (SDLI). Using an international sample across 46 countries over the 1990-2015 period, we show that our SDLI proxies are negatively related to debt maturity, and positively related to the sensitivity of investment to short-term debt. Firms use more SDLI in less financially developed countries and during periods of financial crisis. Tests of our hypotheses show that the use of SDLI is mainly driven by the market timing hypothesis rather than the information asymmetry and agency conflict hypotheses. The use of SDLI is negatively associated with the cost of debt but positively associated with the cost of equity and financial risk. The rationale that firms use SDLI to mitigate their short-term financing costs may lead to overinvestment and ultimately impair the firms’ long-term operational performance. Our findings highlight the importance of conducting maturity matching between corporate debt and investments.

Keywords: Short-term debt; long-term investment; debt maturity mismatch; international finance.

JEL Classification: G31; G32

Suggested Citation

Chen, Lifang and Li, Yong and Wang, Yizhong and Zhang, Bohui, The Long-term Use of Short-term Debt around the World (May 30, 2019). Available at SSRN: https://ssrn.com/abstract=3109327 or http://dx.doi.org/10.2139/ssrn.3109327

Lifang Chen

Xiamen National Accounting Institute ( email )

Xiamen National Accounting Institute
Xiamen, Fujian 361005
China

Yong Li

University of International Business and Economics (UIBE) ( email )

Huixin Dongjie #10
Beijing, 100029
China

Yizhong Wang (Contact Author)

Zhejiang University - College of Economics ( email )

Yuquan Campus 38 Zheda Road
Hangzhou, Zhejiang 310027
China

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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