Can Managers Successfully Time the Maturity Structure of Their Debt Issues?

Abstract

This paper shows that, contrary to existing evidence, corporate managers cannot successfully time the maturity of their debt issues to reduce their cost of capital. Our results indicate that the negative correlation between future excess long-term bond returns and the ratio of long-term debt issues to total debt issues is driven by aggregate pseudo market timing. We show that a structural shift in U.S. monetary and fiscal policy during the early 1980s induces a pseudo market timing effect in the in-sample tests of bond return predictability. After accounting for this structural shift, we find no evidence that corporate managers are able to predict future variations in excess long-term bond returns or to strategically choose the maturity of their debt.

Keywords: Debt maturity, market timing, market efficiency, behavioral finance

JEL Classification: G12, G14, G32