Interest Rates and the Timing of Corporate Debt Issues
48 Pages Posted: 25 Mar 2005
Date Written: March 2005
Graham and Harvey (2001) provide survey results suggesting that managers attempt to time interest rates in their debt issuance decisions. Some of their results may be interpreted as forward-looking (i.e., trying to issue before interest rates rise), and some are backward-oriented, suggesting issuance when interest rates are low compared to historical levels. We employ a sample of more than 14,000 new debt issues over the period 1970-2001 and examine both aspects of debt timing. Our results strongly support backward timing, even after eliminating refinancing transactions, but they do not support the ability to time future interest rates.
Our results contrast with recent findings by Baker, Greenwood and Wurgler (2003) that are based on Flow of Funds data. Our results account for number of issues, amount issued, debt maturity, and call and put features. We examine future interest rates, term spreads and excess bond returns. We find managers were not successful at forward timing when weighting issuances by proceeds, maturity and proceeds, or the effects of call and put features on effective maturity.
In contrast, our results on backward timing strongly support the recent survey evidence on timing. Debt issuance measured by total amount or number of issues is related to the relative level of interest rates in comparison to their historical values. The amount of debt issued and the number of debt issues is strongly related both to the absolute level of interest rates and to their relative historical levels. Firms issue significantly higher amounts of long-term debt when long- term interest rates are low. We control for a variety of other market conditions that could affect issuance.
When interest rates decline, refinancing is common. In our sample, refinancing is indeed much more likely when interest rates are at low historical levels. However, the non-refinancing transactions still demonstrate that debt issuance is significantly more common when relative interest rate levels are low. Refinancing transactions do not cause the results.
Our results are consistent with the survey results of Graham and Harvey (2001) and Bancel and Mittoo (2004) showing that financial managers seek to issue debt when rates are "particularly low." Our results are not consistent with forward debt timing. Thus, if managers attempt to issue longer-term debt when they anticipate that future interest rates or spreads will rise or excess bond returns will be negative, they appear to be unsuccessful.
Keywords: Market timing, public debt, financial policy
JEL Classification: G32, G10, G20
Suggested Citation: Suggested Citation