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

Abstract

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