Liquidity Management and Industry Interactions: Evidence from Debt Maturity Choices

Abstract

This paper studies the debt maturity decisions of firms and provides evidence suggesting that firms in an industry manage their liquidity in an interdependent way. We find that higher industry cash flow volatility is associated with a smaller likelihood that firms have their long-term debt largely maturing at the same time as their industry peers. We provide evidence that this captures how firms time their debt maturity, as opposed to systematic differences in debt maturity structure. This effect is only important when peers’ debt level is significant, in industries with both specialized assets and greater competition, and is robust to identification based on cash flow correlations within an industry. Overall, our analysis suggests that, while choosing financial policies in an important set of industries, firms attempt to have greater liquidity in states of the world where industry peers are financially weaker. We would like to thank Murillo Campello, Harry DeAngelo, Arthur Korteweg, John Matsusaka, Kevin J. Murphy, Oguzhan Ozbas, and Gordon Phillips for helpful comments.