Optimal Debt Maturity and Firm Investment

40 Pages Posted: 2 Dec 2020

See all articles by Joachim Jungherr

Joachim Jungherr

University of Bonn

Immo Schott

University of Montreal - Department of Economics

Date Written: September , 2020

Abstract

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

Jungherr, Joachim and Schott, Immo, Optimal Debt Maturity and Firm Investment (September , 2020). Available at SSRN: https://ssrn.com/abstract=3714886 or http://dx.doi.org/10.2139/ssrn.3714886

Joachim Jungherr (Contact Author)

University of Bonn

Germany

Immo Schott

University of Montreal - Department of Economics

C.P. 6128, succursale Centre-Ville
C-6028
Montreal, Quebec H3C 3J7 H2W1R9
Canada

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