The Maturity Structure of Debt: Determinants and Effects on Firms' Performance?Evidence from the United Kingdom and Italy

Abstract

The authors empirically investigate the determinants and consequences of the maturity structure of debt, using data from a panel of UK and Italian firms. They find that in choosing a maturity structure for debt, firms'tend to match assets and liabilities. They conclude that more profitable firms'(as measured by the ratio of cash flow to capital) tend to have more long-term debt. The data do not support the hypothesis that short-term debt, through better monitoring and control, boosts efficiency and growth -rather, the opposite can be concluded. In both countries, the data suggest a positive relationship between initial debt maturity and the firms' subsequent medium-term performance (i.e., profitability and growth in real sales). In both countries total factor productivity (TFP) depends positively on the length of debt maturity when the maturity variable is entered both contemporaneously and lagged. But in Italy the positive effect of the length of maturity on productivity is substantially reduced or even reversed when the proportion of subsidized credit increases. The authors: document the relationship between firms' characteristics and their choice of shorter or long-term debt by estimating a maturity equation and interpreting the results in light of insights from theoretical literature, and by analyzing the effects of maturity on firms' later performance in terms of profitability, growth, and productivity; assess how TFP depends on the degree of leverage and the proportion of longer and shorter-term debt; and analyze the relationship between firms' debt maturity and investment.