The Effect of Chinese Interest Rate Liberalization on Corporate Debt Maturity Structure

Abstract

Debt maturity model is constructed under constant interest rate in this paper, combined with the reformation characteristic of financial system in China. The analysis suggests that under fixed interest rate caused by financial repression, none but enterprises with high quality could choose optimal debt maturity structure to maximize their own utility; most of firms with average quality or poor quality could not choose optimal debt maturity structure on their own initiative, while they would only be distribute debt of different maturity structure by bank who estimate the risk of loan with debt repay index. So the lower of corporate debt paying ability, the less of long-term debt banks would distribute, which result in overmuch proportion of short term debt in debt maturity structure in Chinese firms. With the deepening of interest rate market reformation, the control of float rate would be reduced step by step. As a result, the structural shortage of long-term debt in corporate debt maturity structure will be settled effectively. Banks relieve risk of debt repayment by adjust level of interest rate, and all the firms could achieve optimal debt maturity structure to maximize own utility. On the other hand, with the liberalization of interest rates, the signaling function of debt maturity structure would be resumed so that we can distinguish private information of corporate quality by its debt maturity structure.