The Maturity Premium
48 Pages Posted: 13 Nov 2018 Last revised: 25 Nov 2018
Date Written: November 23, 2018
We analyze asset-pricing implications of debt maturity. Firms with long debt maturities have weaker incentives to delever after negative shocks and therefore exhibit high leverage and high betas during downturns when the market price of risk is high. They also increase leverage less aggressively during booms. Thus, the betas of firms with longer debt maturities covary more with the market price of risk. As a result, they generate higher expected returns, controlling for average exposure to systematic risk. We demonstrate this in a model and document empirically a 0.21% monthly premium for buying long-maturity financed firms and selling those with shorter debt maturities.
Keywords: maturity, value premium, debt overhang, cross-section of stock returns, CAPM
JEL Classification: G12, G32, G33
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