Optimal Debt Maturity and Firm Investment
40 Pages Posted: 2 Dec 2020
Date Written: September , 2020
We introduce long-term debt and a maturity choice into a dynamic model of production, firm financing, and costly default. Long-term debt saves roll-over costs but increases future leverage and default rates because of a commitment problem. The model generates rich distributions of maturity choices, leverage ratios, and credit spreads across firms. It explains why larger and older firms borrow at longer maturities, have higher leverage, and pay lower credit spreads. Firms' maturity choice matters for policy: A financial reform which increases investment and output in a standard model of short-term debt can have the opposite effect in a model with short-term debt and long-term debt.
Keywords: firm dynamics, firm financing, debt maturity, default
JEL Classification: E22, E44, G32
Suggested Citation: Suggested Citation