Short-Term Debt Overhang

57 Pages Posted: 5 Dec 2022

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: November 18, 2022

Abstract

We show that short-term debt in a firm’s optimal capital structure reduces investment under asymmetric information. Investors’ interpretation of underinvestment as a positive signal about the quality of the assets in place allows the equity holders to profit from short-term debt repricing at the rollover stage. Thus, underinvestment is more pronounced at shorter maturities, in contrast to Myers (1977). Low types' incentives to mimic put an endogenous constraint on high types' underinvestment payoff via a duration floor. Perhaps most strikingly, because cash lowers the duration floor, an increase in a firm’s retained earnings can decrease investment.

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 (November 18, 2022). 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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