The Long-term Use of Short-term Debt around the World

Abstract

We propose novel proxies to identify firms that use short-term debt to fund long-term investment (SDLI). Using an international sample across 46 countries over the 1990-2015 period, we show that our SDLI proxies are negatively related to debt maturity, and positively related to the sensitivity of investment to short-term debt. Firms use more SDLI in less financially developed countries and during periods of financial crisis. Tests of our hypotheses show that the use of SDLI is mainly driven by the market timing hypothesis rather than the information asymmetry and agency conflict hypotheses. The use of SDLI is negatively associated with the cost of debt but positively associated with the cost of equity and financial risk. The rationale that firms use SDLI to mitigate their short-term financing costs may lead to overinvestment and ultimately impair the firms’ long-term operational performance. Our findings highlight the importance of conducting maturity matching between corporate debt and investments.