Asset Life, Leverage, and Debt Maturity Matching

80 Pages Posted: 9 Feb 2022 Last revised: 12 Feb 2024

See all articles by Thomas Geelen

Thomas Geelen

Copenhagen Business School - Department of Finance; Danish Finance Institute

Jakub Hajda

HEC Montreal - Department of Finance

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Adam Winegar

BI Norwegian Business School

Date Written: October 5, 2023

Abstract

Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.

Keywords: capital age, asset life, maturity matching, debt cycles, maturity cycles

JEL Classification: E32, G31, G32

Suggested Citation

Geelen, Thomas and Hajda, Jakub and Morellec, Erwan and Winegar, Adam, Asset Life, Leverage, and Debt Maturity Matching (October 5, 2023). Journal of Financial Economics (JFE), Forthcoming, Swiss Finance Institute Research Paper No. 24-06, Available at SSRN: https://ssrn.com/abstract=4025812 or http://dx.doi.org/10.2139/ssrn.4025812

Thomas Geelen

Copenhagen Business School - Department of Finance

Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Danish Finance Institute ( email )

Jakub Hajda

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Adam Winegar

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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