Short-Term Debt Overhang

65 Pages Posted: 5 Dec 2022 Last revised: 13 Oct 2023

See all articles by Kostas Koufopoulos

Kostas Koufopoulos

University of York

Giulio Trigilia

University of Rochester - Simon Business School

Pavel Zryumov

University of Rochester - Simon Business School

Date Written: October 3, 2023

Abstract

We consider a dynamic asymmetric information model where firms face multiple investment opportunities and their capital structure is endogenous at all times.We identify a new economic force, short-term debt overhang, which leads firms to issue short-term debt and subsequently underinvest in growth options. This force, which arises at the optimal mechanism and is time- consistent, generates several new testable predictions. Strikingly, we find that greater retained earnings, or cash, can reduce the investment in positive net present value projects by firms with intermediate credit ratings, and that these firms are the most likely to issue short-term debt.

Keywords: debt overhang, adverse selection, capital structure, debt maturity, underinvestment

JEL Classification: G32

Suggested Citation

Koufopoulos, Kostas and Trigilia, Giulio and Zryumov, Pavel, Short-Term Debt Overhang (October 3, 2023). Available at SSRN: https://ssrn.com/abstract=4283044 or http://dx.doi.org/10.2139/ssrn.4283044

Kostas Koufopoulos

University of York ( email )

Heslington
York, YO1 5DD
United Kingdom

Giulio Trigilia

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Pavel Zryumov (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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