Why Do Financial Firms Borrow Short-Term? Debt Maturity and Information Production
73 Pages Posted: 4 Dec 2019 Last revised: 7 Jan 2020
Date Written: January 7, 2020
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: Suggested Citation