Why Do Financial Firms Borrow Short-Term? Debt Maturity and Information Production

73 Pages Posted: 4 Dec 2019 Last revised: 7 Jan 2020

See all articles by Gregory Weitzner

Gregory Weitzner

University of Texas at Austin - Department of Finance

Date Written: January 7, 2020

Abstract

The maturity of a firm’s liabilities affects the information financiers produce about the firm’s assets. In my model, long-term financing creates an excessive tendency for financiers to acquire information and screen out lower quality borrowers. In contrast, short-term financing deters information production at origination but induces it when firms are forced to liquidate, depressing the market value of assets due to adverse selection. Through the feedback effect between firms’ maturity structures and asset prices, increases in uncertainty can impair the aggregate volume of short-term financing and investment. The analysis can jointly rationalize: i) the widespread use of short-term debt by financial firms, ii) fire sales in financial assets, iii) periodic disruptions in short term funding markets and iv) regulatory concerns about excessive short-term debt.

Keywords: Short-Term Funding, Capital Structure, Security Design, Debt Maturity, Fire Sales

JEL Classification: G23, G32, G28

Suggested Citation

Weitzner, Gregory, Why Do Financial Firms Borrow Short-Term? Debt Maturity and Information Production (January 7, 2020). Available at SSRN: https://ssrn.com/abstract=3488797 or http://dx.doi.org/10.2139/ssrn.3488797

Gregory Weitzner (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
26
Abstract Views
354
PlumX Metrics