Maturity Choice Research Articles

Going long, going short, issue or liquidate? Corporate debt maturity of Mexican public firms

PurposeThis paper studies the determinants of the debt maturity of Mexican-listed companies by analysing the effects on the extensive (issuing or liquidating debt) and the intensive (debt maturity renegotiation) margins.Design/methodology/approachThis study, using a Tobit model for panel data and measuring maturity as a time variable, shows that size, liquidity and leverage, among other firm characteristics, as well as the market interest rate, explain debt maturity. Additionally, the study employs the McDonald and Moffitt decomposition to determine whether the explanatory variables of maturity have a more significant effect on the decision to issue or liquidate debt or on debt maturity renegotiations.FindingsThe results obtained highlight that the market interest rate negatively affects debt maturity. On the other hand, variables like size, liquidity, collateral and leverage demonstrate a positive relationship with the dependent variable. In addition, the extensive margin has a higher impact on corporate debt than the intensive margin, suggesting that firms prefer to liquidate or issue new debt rather than renegotiate preexisting contracts.Research limitations/implicationsThe main limitation of this study is the use of an unbalanced panel. The lack of data limits the application of specific methodologies suggested by the literature as a way to test the robustness of the estimates.Originality/valueFirst of all, this study adds empirical evidence of debt maturity decisions by publicly traded firms in a middle-income country such as Mexico to the existing literature on maturity choice. Second, the study treats debt maturity as a time-censored, limited variable. Finally, the authors have used the McDonald and Moffitt (1980) methodology to decompose the effect of each independent variable into extensive and intensive margins.

Debt maturity and climate change exposure: does life cycle moderate?

PurposeIn this study, I explore how climate exposure influences debt maturity and whether the life cycle moderates this relationship.Design/methodology/approachThis study employs robust panel fixed-effects regression models on 32,249 firm-year observations over 2002–2022. The meticulous examination of the relationship between climate exposure and debt maturity and the use of IV regression models to address endogeneity ensure the validity and reliability of the findings. Exploiting an external shock to validate the results further enhances the robustness of the analysis.FindingsThe study reveals that climate change exposure significantly negatively affects debt maturity, a finding that holds for both climate-related opportunities and regulatory risks. While the life cycle impacts debt maturity, it exacerbates the negative effect for firms in the introductory and growth phases. This exacerbation is due to underinvestment problems and a lack of financial flexibility. These findings shed new light on the relationship between climate exposure and debt maturity, providing valuable insights for corporate finance professionals and strategic managers.Practical implicationsThe evidence presented in this study has strategic implications for corporate managers, investors, academia and other stakeholders. The insights on the choice or substitution of debt maturity during certain life cycle phases can provide valuable guidance to management, empowering them to make informed decisions.Originality/valueThe dynamic role of the corporate life cycle in the relationship between capital structure and climate exposure is a novel area of research. This paper significantly contributes to our understanding of the combined relationship of firm life cycle and climate exposure on debt maturity, offering a fresh perspective on an underexplored topic. This study’s unique approach and original findings will pique the interest of academic researchers and corporate finance professionals alike.

Does firm culture influence corporate financing decisions? Evidence from debt maturity choice

This study establishes a relation between corporate culture and debt maturity choice. Specifically, superior corporate culture is associated with the choice of shorter-term debt, supporting the notion that superior culture reduces managerial agency problems resulting in managers being more receptive to external monitoring through the choice of shorter-term debt. The culture subcomponents of integrity, teamwork, and innovation are found to have a meaningful influence on the debt maturity structure choice. The relation between culture and debt maturity is more pronounced in firms with higher managerial stock ownership and those that are financially constrained, but is weakened in firms with a greater CEO sensitivity to stock prices. Additionally, firms with superior culture are shown to have higher long-term credit ratings. These findings contribute at the confluence of corporate culture and debt financing literatures. A battery of robustness tests, including addressing endogeneity concerns, validate the findings.

Belief disagreement and debt maturity structure

This paper examines how investors’ belief disagreement affects the firm’s debt maturity choice. We find that in the presence of belief disagreement, the firm prefers short-term debt to long-term debt. This is because short-term debt is less risky and can attract more optimistic investors, which raises the debt price and reduces the cost of debt financing. Our result is stronger when long-term debt is more risky compared to short-term debt and investors’ belief dispersion is higher.

Firms’ financing and debt maturity choices: An empirical analysis from the perspective of asset value dynamics

AbstractWe examine empirically the relationship between the dynamics of firm value and their financing and debt maturity choices. Theoretical studies show that the actual drift of firm value is a key determinant of firms’ leverage and debt maturity by incorporating the conflicts between undiversified insiders (managers) and well‐diversified outside investors. We empirically analyze firms’ incremental leverage and debt maturity choice important determinants of firms’ leverage and debt maturity, we find that the drift, or the expected return of total assets, does affect the firms’ choices of incremental leverage and debt maturity, as predicted by theoretical studies. Our results provide the evidence that the divergence of interests between undiversified managers and well‐diversified shareholders has significant impact on firms’ financing policies that are generally controlled by managers, and the resulting leverage and maturity choices may deviate from maximizing shareholders’ value.

Naḥwa Manhaj Wasatī Fī Al-Tafsīr: Min Al-Wasaṭiyya Ilā Al-Muwāṭana Fī Miḥwar Al-Insāniyya ʿinda Al-Ḥabīb ʿalī Al-Jufrī

This article aims to explore the concept of Islamic moderation and its role in achieving citizenship through the principle of "humanity before religiosity" from the perspective of Habib Ali Zain al-Abidin al-jufri. The study addresses the following research questions: How does Ḥabīb ʿAlī al-Jufrī promote the concept of "humanity before religiosity," and how does this concept contribute to enhancing Islamic moderation and achieving citizenship? The article employs a critical analytical methodology to study the texts and interpretations of Habib Ali Zain al-Abidin al-Jufri, focusing on his interpretations that emphasize human values over strict adherence to religious laws. The study concludes that the principle of "humanity before religiosity" proposed by Ḥabīb ʿAlī al-Jufrī aligns with the core values of humanity and the objectives of Islamic law (Sharia). Ḥabīb ʿAlī al-Jufrī considers humanity as the foundation of moderation, which is the path to achieving citizenship in contemporary society. The research illustrates that the essence of moderation lies in prioritizing human values over religiosity, thereby promoting peaceful coexistence and tolerance among individuals and groups. The article asserts that moderation, as interpreted by Ḥabīb ʿAlī al-Jufrī, is an effective factor in affirming and achieving citizenship amidst religious, ethnic, and political diversity within the context of the nation-state. Achieving citizenship is linked to achieving humanity, where individuals enjoy the freedom of mature choice, including the freedom to choose citizenship. Accordingly, the article highlights the importance of moderation in Islamic interpretation as a means to enhance human values and citizenship, offering new insights into the relationship between religion and citizenship in contemporary societies.

What do we Know about Corporate Debt Maturity Structure in Saudi Arabia?

Abstract This study examines the firm-specific and macroeconomic factors that influence corporate debt maturity structure in Saudi Arabia and explores whether existing theories can predict corporate debt maturity structure. The sample includes 121 listed non-financial firms operating in Saudi Arabia over the years 2010-2021 and employs a static ordinary least square (OLS) model before and after incorporating industry fixed effects. Approximately 52% of Saudi firms’ total debt consists of long-term debt, which is higher than other firms' long-term debt usage, operating in emerging markets. Furthermore, the study finds that both firm-specific and macroeconomic factors are important determinants of Saudi firms’ debt maturity structure decisions. The firm-specific determinants including leverage, profitability, size, liquidity, and asset maturity are positively related to corporate debt maturity choice. However, firms’ risk is negatively associated with debt maturity structure. Economic growth (GDP) has a positive linkage with corporate debt maturity, while the interest rate negatively impacts long-term debt maturity. The results support the matching theory, while it does not support the agency and the signaling theories. At best, this is one of the earliest studies that investigate the influence of firm-specific and macroeconomic factors on Saudi firms’ debt maturity structure decisions. JEL classification numbers: G3, G32. Keywords: Debt maturity, Firm-related factors, Macroeconomic factors, Saudi Arabia.

Brand capital on debt maturity structure

This study examines whether brand capital is associated with debt maturity choice. For listed firms in the U.S. over the period from 1975 to 2019, we find that investment in brand capital through ongoing advertising outlays is positively related to the use of short-term debt. The result is consistent with the hypothesis that high brand capital firms use short-term debt because of beneficial signaling effects. We also find the positive effect of brand capital on the use of short-term debt is more pronounced for higher quality firms and firms with lower financial constraints, which provides further support for the signaling explanation. Finally, we show that brand capital decreases the extent to which investments are financed by using long-term debt and increases the extent to which investments are financed by using short-term debt and equity.

Can at-the-Market Offerings Affect REIT Debt Maturity Choice?

This study examines the differences in debt maturity choice between Real Estate Investment Trusts (REITs) with At-the-Market (ATM) offerings and those without, as well as the subsequent changes in REIT debt maturity following the adoption of ATM programs. We find that ATM REITs consistently maintain higher levels of long-term debt than non-ATM REITs, even after implementing ATM offerings. It suggests that the capital raised through ATM offerings is not primarily utilized to reduce long-term debt. Additionally, the study highlights that small REITs experience a significant increase in short-term debt when actively employing ATM offerings. This outcome indicates that ATM programs offer smaller REITs the necessary financial flexibility to raise funds and address short-term debt obligations.

The moderating role of CEO overconfidence on debt maturity decisions: evidence from the MENA region

Purpose This study aims to analyze how cultural variations impact the relationship between long-term debt use and managerial overconfidence. Investigate into how the relationship between growth prospects and the utilization of long-term debt is moderated by managerial overconfidence. In addition, the research explores the moderating effect of managerial overconfidence on cash flow levels. Design/methodology/approach The study used long-term debt as the dependent variable and used generalized method of moments–instrumental variables regression analysis to examine data from 356 firms across 11 Middle East and North Africa (MENA) countries and 5 industries between 2013 and 2021. Findings CEO overconfidence moderately boosts the link between long-term debt maturity and growth potential, particularly for firms with limited internal funding. Cultural factors, such as masculinity and uncertainty avoidance, play a significant role in moderating the relationship between managerial overconfidence and debt maturity choices. Practical implications To understand the impact of managerial overconfidence on a company’s debt maturity decision, it is essential for boards and shareholders to consider and monitor the CEO’s behavioral traits, particularly for growing companies. Regulators and policymakers must also be wary of the risk of internal control weakening due to overconfident managers, especially in MENA markets. Originality/value The authors’ contribution to the literature lies in exploring how managerial overconfidence moderates the agency conflict between shareholders and debtholders in MENA region firms, which has received minimal attention in previous studies. This study expands the knowledge of the impact of managerial overconfidence on emerging economies and provides evidence that national culture plays a vital role in determining debt financing decisions.

Is closing the agricultural yield gap a “risky” endeavor?

CONTEXTSub-Saharan Africa (SSA) has the climatic and biophysical potential to grow the crops it needs to meet rapidly growing food demand; however, agricultural productivity remains low. While potential maize yields in Zambia are 9 t per hectare (t/ha), the average farmer produces only 1–2. OBJECTIVEWe evaluate the contribution of responses to weather risk to that gap by decomposing the yield gap in maize in Zambia. While we know that improved seed and fertilizer can expand yield and profit, they may also increase the variance of yield under different weather outcomes, reducing their adoption. METHODSWe use a novel approach combining crop modeling and statistical analysis of survey data to obtain the yield gap components in Zambia driven by input cost and input risk. We use a crop model to simulate district-level marginal effects of fertilizer and seed maturity choice on the mean and variance of expected yield and profit under all-weather outcomes for each district for the past 30 years. We compare input levels that maximize expected yield to those that maximize expected profit and maximize the expected mean-variance trade-off assuming risk-aversion. To determine how much farmers' input choices are made to reduce risk, we then quantify differences in the expected riskiness of inputs by district. RESULTS AND CONCLUSIONSWe find approximately one-quarter of the yield gap can be explained by risk-reducing behavior, albeit with a substantial geographic variation. Given this finding, under present conditions, we expect that the average maximum yield that farmers can obtain without increasing risk is 6.75 t/ha compared to a potential profit-maximizing level of 8.84 t/ha. SIGNIFICANCEThe risk-related yield gap is only expected to increase with weather extremes driven by climate change. Promoting “one-size-fits all” solutions to closing the yield gap could underestimate the effect of risk mitigation on agricultural production while increasing farmers' risk exposure.

Corporate debt maturity and investment over the business cycle

The business cycle dynamics of firms’ debt maturity vary across the firm size distribution. Small and medium-sized firms have a more pro-cyclical debt maturity than large firms. This paper explores the determinants of firms’ debt maturity, and the importance of firms’ debt maturity for their investment and leverage dynamics. To do so, it embeds a maturity choice in a model of firm investment and financing. Firms shorten debt maturity during times when default risk premiums are high and their internal funds are scarce. This behavior is consistent with both the life cycle and business cycle dynamics of firms’ debt maturity. Endogenous debt maturity helps firms to deleverage faster in response to negative shocks.

Subsidiary financing choices: The roles of institutional distances from home countries

We examine how the institutional distance between home and host countries is associated with the characteristics of foreign subsidiary debt, including leverage, debt maturity choices, and cash holdings. We utilize the multidimensionality of institutional distances to examine ten different distance dimensions. We use a sample of 3139 foreign subsidiaries operating in France and being headquartered in 44 different countries. We find that while subsidiaries' financing choices are partially explained by standard determinants, they are also significantly associated with different forms of institutional distance. Regarding the heterogeneity of institutional distances, results show the dominance of financial and cultural distances for leverage levels; knowledge and political distances for debt maturities; and a dominance of demographic, geographic, and political distances for cash holdings levels.

Local institutional investors and debt maturity

We examine the relation between the geographic proximity of institutional investors and debt maturity. We hypothesize and find that firms with more or closer local institutional investors have shorter maturity debt. Analyses based on new debt issues and using SOX as a natural experiment and firm headquarter relocations as exogenous shocks indicate a causal effect of local institutional monitoring on debt maturity. Tests of the underlying mechanism suggest that firms monitored by local institutional investors choose shorter maturity debt to reduce debt and equity agency costs. The results demonstrate that local institutional investors affect firms’ debt maturity choices.

Debt Refinancing and Equity Returns

ABSTRACTThis paper presents empirical evidence that the maturity structure of financial leverage affects the cross‐section of equity returns. We find that short‐term leverage is associated with a positive premium, whereas long‐term leverage is not. The premium for short‐term compared to long‐term leverage reflects higher exposure of equity to systematic risk. To rationalize our findings, we show that the same patterns emerge in a model of debt rollover risk with endogenous leverage and debt maturity choice. Our results suggest that analyses of leverage effects in asset prices and corporate financial applications should account for the maturity structure of debt.

Improving sovereign debt restructurings

The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings. The global financial crisis and the recent global pandemic have further reignited this discussion among academics and policymakers. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that incorporates two essential features of debt: maturity choice and debt renegotiation in default. We find, first, that a rule that tilts the distribution of creditor losses during restructurings toward holders of long-maturity bonds reduces short-term yield spreads, lowering the probability of a sovereign default by 25 percent. Second, issuing GDP-indexed bonds exclusively during restructurings also reduces the probability of default, especially of defaults in the five years following a debt restructuring. The policies lead to welfare improvements and reductions in haircuts of similar magnitude when implemented separately. When jointly implemented, they reinforce each other’s welfare gains, suggesting good complementarity.

Liquidation threat: Behavior of CEO entrenchment

This study investigated the effect of CEO entrenchment on a firm's debt maturity choice. We examine US firms using the 2006–2017 sample period and find that entrenched managers choose debt with longer maturity financing to avoid early liquidation. Additionally, we detect a possible channel between entrenchment and debt maturity using shareholder-initiated proposals. Finally, firms with high (low) informational opacity (credit quality) will force entrenched managers to extend their debt maturity. We provide useful policy implications for shareholders and investors and new insights into CEO entrenchment, debt maturity, and shareholder-initiated proposals.

Implications of public corruption for local firms: Evidence from corporate debt maturity

Using political corruption conviction data from the U.S. Department of Justice, we examine the impact of local corruption on firms’ debt maturity structure while exploring both demand-side and supply-side explanations. Our results support the demand-side story and indicate that firms in high corruption areas utilize less short-term debt to mitigate liquidity and refinancing risks. Consistent with this, we find the effect is more pronounced among firms with smaller size, lower asset redeployability, and higher volatility. Our findings remain robust to the inclusion of an array of controls expected to influence debt maturity preferences as well as time, industry, and state fixed effects. Moreover, a seemingly unrelated regression approach, instrumental variables regression, propensity score matching, placebo analyses, and alternative corruption measures corroborate our findings. Altogether, our results indicate that firms alter their debt maturity choices in response to local corruption to limit refinancing risk and the uncertainty created by corrupt government officials.

Managerial ability and debt maturity

We examine whether and how managerial ability affects corporate debt maturity decisions. The demand for shorter maturity debt is expected to be higher in firms operated by high-ability managers, who possess the superior skills needed to anticipate firms’ economic prospects and communicate their private information, thereby alleviating information asymmetry and bolstering their reputation. We document that firms with high ability managers are associated with more short-term debt financing. The effect becomes stronger for firms facing severe information asymmetry problems, unconstrained firms or high quality firms. Supportive evidence is found from the analysis of short- and long-term debt issuance activity. Our findings remain robust to alternative measures of managerial ability and debt maturity choice, and are not driven by omitted variable bias, endogeneity concerns or industry group. Overall, we provide robust evidence that supports the signalling theory for debt maturity structure and contributes to the literatures on managerial ability.

Real Effects of Financial Distress: The Role of Heterogeneity

Abstract Which firms are more sensitive to an aggregate financial shock? What can be learnt from these heterogeneous responses? We evaluate and answer these questions from both empirical and theoretical perspectives. Using microdata from Portugal during the sovereign debt crisis we find that highly leveraged firms and firms with a larger share of short-term debt on their balance sheets contracted more in the aftermath of the financial shock. We analyse the conditions under which leverage and debt maturity determine the sensitivity of firms’ investment decisions to financial shocks in standard models of investment under financial frictions. In doing so, we extend these models to feature a maturity choice. We show that simple versions of these models are not consistent with the observed heterogeneous responses. The model needs the presence of frictions when issuing long-term debt to rationalise the empirical findings.