Does Short-Maturity Debt Discipline Managers? Evidence from Cash-Rich Firms' Acquisition Decisions

We study the disciplinary role of short-maturity debt in cash-rich firms. We report evidence that such debt mitigates cash-rich firms’ overinvestment in acquisitions. The disciplinary role is mostly concentrated among cash-rich firms that are weakly governed and have limited access to the public debt market and is also more pronounced for cash-rich firms that operate in less competitive industries. Furthermore, for cash-rich acquirers, high levels of short-maturity debt are associated with higher acquisition announcement returns and better post-acquisition operating performance. Overall, our results highlight the effective role of short-maturity debt in reducing agency cost.

Keywords: Debt Maturity, Short-Maturity Debt, Acquisitions, Cash Holdings, Agency Conflicts

JEL Classification: G30, G34

Suggested Citation: Suggested Citation

Huang, Qianqian and Jiang, Feng and Wu, Szu-Yin (Jennifer), Does Short-Maturity Debt Discipline Managers? Evidence from Cash-Rich Firms' Acquisition Decisions (July 2018). Journal of Corporate Finance 53 (2018) 133-154, Available at SSRN: https://ssrn.com/abstract=3262955 or http://dx.doi.org/10.2139/ssrn.3262955