Debt Maturity and the Dynamics of Leverage

64 Pages Posted: 6 Mar 2005 Last revised: 26 Oct 2020

See all articles by Thomas Dangl

Thomas Dangl

Vienna University of Technology

Josef Zechner

Vienna University of Economics and Business

Date Written: October 21, 2020

Abstract

This paper shows that short debt maturities commit equityholders to leverage reductions when refinancing expiring debt in low-profitability states. However, shorter maturities lead to higher transactions costs since larger amounts of expiring debt need to be refinanced. We show that this tradeoff between higher expected transactions costs against the commitment to reduce leverage in low-profitability states, motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress and risky cash flows benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt. Empirical evidence supports the model predictions.

Keywords: debt maturity, optimal capital structure choice

JEL Classification: G3, G32

Suggested Citation

Dangl, Thomas and Zechner, Josef, Debt Maturity and the Dynamics of Leverage (October 21, 2020). Available at SSRN: https://ssrn.com/abstract=890228 or http://dx.doi.org/10.2139/ssrn.890228

Thomas Dangl (Contact Author)

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
Austria

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,038
Abstract Views
5,165
rank
28,010
PlumX Metrics