Debt Maturity Choices Research Articles

Relationship Capital and Financing Decisions

Lending relationships matter for firm financing. In a model of debt dynamics, we study how lending relationships are formed and how they impact leverage and debt maturity choices. In the model, lending relationships evolve through repeated interactions between firms and debt investors. Stronger lending relationships lead firms to adopt higher leverage ratios, issue longer term debt, and raise funds from non-relationship lenders when relationship quality is sufficiently high. The maturity of debt contracts issued to non-relationship investors is higher than that of relationship investors. Negative shocks to relationship lenders drastically affect the financing choices of firms with intermediate relationship quality.

Debt maturity choice in CEOs’ incentive to signal abilities

ABSTRACT This research examines the effect of CEOs’ ability concerning their debt maturity choice. Examining public firms over the period 1997–2016 in Taiwan, we find that high-ability managers choose short-term debt financing to signal their ability. We adopt the rollover risk channel to prove that managers signal their ability on the use of short-term debt are only from their intention. In addition, we consider the separation of ownership and control as well as information opacity, which could force managers to have a greater incentive to use short-term debt for signaling their ability to align the managers-shareholders conflict and maintain their reputation, compensation, and bonus from being affected by information opacity.

Do shareholder protection and creditor rights have distinct effects on the association between debt maturity and ownership structure?

AbstractThis study examines the effects of the firm's ownership concentration and its institutional environment on corporate debt maturity choices. As ownership concentration and debt maturity are alternative governance mechanisms, we theorize and investigate whether their association is influenced by country‐level governance factors that enhance outside monitoring by minority shareholders and debtholders. Our investigation is based on a dataset of 50,599 firm‐year observations from 38 countries. We use a propensity‐score matching approach and find that the effect of ownership concentration on debt maturity is conditional to country‐level governance attributes. Ownership concentration has a negative effect on debt maturity in countries where both shareholder protection and creditor rights are weak. Ownership concentration, however, tends to lengthen debt maturity as protection increases, and this positive effect on the length of debt maturity is stronger in countries enhancing protection towards debtholders (instead of shareholders). We also explore other characteristics of ownership structure, such as the identity and presence of controlling shareholders. These results corroborate the view that entrenched shareholders may use debt maturity opportunistically. Our study provides new insights into the interplay between firm‐ and country‐level governance mechanisms and a deeper understanding of cross‐country differences in the association between ownership structure and debt financing.

Institutional Distance and Subsidiary Debt: The Spillover Effect of Home Country Institutional Quality

This study examines the spillover effects of home country institutional and cultural characteristics on the subsidiaries operating in France while they are in the process of making capital structure choices and debt maturity choices. We document that while subsidiaries financing choices are partially explained by standard determinants, at the same time, these choices are impacted by cultural distance factors such as economic, financial, and political distance. Namely, cultural distance is one of the essential determinants of the long-term debt proportion in the total amount of debt used for the financing of foreign subsidiaries in France.

Debt maturity and the development of financial markets in Vietnamese listed firms

This study examines the determinants of the corporate debt maturity structure for the period from 2007 to 2016, utilising a sample of non-financial listed firms chosen from two stock exchanges: the Ho Chi Minh Stock Exchange (HOSE) and the Ha Noi Stock Exchange (HNX). The regression results partially support the theories of agency cost, signalling and liquidity risk and provide little evidence supporting the theory of tax minimisation. We find that leverage, firm size and lagged debt maturities are the important factors in the choice of corporate debt maturity. Other evidence documents that the development of the equity market plays an important role in the financial structure.

Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage: Evidence from Chinese Listed Companies

The study examines the effects of growth opportunities, debt maturity and liquidity risk on leverage, making use of a large panel of Chinese listed firms. Research on capital structure has broadened its scope from a single capital structure decision (the debt/equity choice) to various attributes of the debt in firms' capital structure. We use the system Generalized Method of Moments estimator to control for unobserved heterogeneity and the potential endogeneity of regressors. We find a negative relationship between growth opportunities and leverage. Further, we find that while the proportion of short-term debt attenuates the negative effect of growth opportunities on leverage, it negatively affects leverage as predicted by the liquidity risk hypothesis. When we distinguish between state owned firms and private controlled firms, we find evidence that these effects are only relevant to private controlled firms. However, our analysis indicates that the economic implication of liquidity risk effect is much lower for Chinese firms than that observed in the literature for US firms. Our study suggests that these differences can be explained by differences in the institutional environment in which firms operate. This finding related to Diamond's (1991) liquidity risk hypothesis extends our understanding of the relationship between liquidity risk and the debt maturity choice.

Managerial compensation incentives and corporate debt maturity: Evidence from FAS 123R

This paper studies the effect of risk-taking incentives provided by option compensation on corporate debt maturity choices. The Financial Accounting Standard (FAS) 123R is used as a quasi-natural experiment to establish causality. FAS 123R requires firms to expense stock options at fair value, which has resulted in a dramatic reduction in option compensation and managerial risk-taking incentives. We find that treated firms significantly increased debt maturity relative to control firms. Further tests identify that the alleviation of creditor-shareholder agency conflicts due to the adoption of FAS 123R is the underlying mechanism driving the result.

Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage: Evidence from Chinese Listed Companies

Research on capital structure has broadened its scope from a single capital structure decision (the debt/equity choice) to various attributes of the debt in firms’ capital structure. This study examines the effects of growth opportunities, debt maturity and liquidity risk on leverage, making use of a large panel of Chinese listed firms. We use the system Generalized Method of Moments (GMM) estimator to control for unobserved heterogeneity and the potential endogeneity of regressors. We find a negative relationship between growth opportunities and leverage. Further, we find that while the proportion of short-term debt attenuates the negative effect of growth opportunities on leverage, it negatively affects leverage as predicted by the liquidity risk hypothesis. When we distinguish between state owned firms and private controlled firms, we find evidence that these effects are only relevant to private controlled firms. However, our analysis indicates that the economic implication of liquidity risk effect is much lower for Chinese firms than that observed in the literature for US firms. Our study suggests that these differences can be explained by differences in the institutional environment in which firms operate. This new finding related to Diamond’s (1991) liquidity risk hypothesis extends our understanding of the relationship between liquidity risk and the debt maturity choice.

A Model of Endogenous Debt Maturity with Heterogeneous Beliefs

This paper studies optimal debt maturity in an economy with repayment enforcement frictions and investors disagree about repayment probabilities. The optimal debt maturity choice is a mix of long- and short-term debt securities. Spreading risky debt claims on cash flows over time allows debt to be priced by investors most willing to hold risk at each point in time, thereby increasing investment and output. By contrast, a single maturity, either all long- or short-term, will be priced by investors less willing to hold risk, which reduces investment and output. The model provides a novel explanation for the stylized fact that large and mature companies almost always issue debt with multiple maturities rather than a single maturity, and is broadly consistent with empirical debt maturity results. Lastly, we show that non-financial covenants that prevent debt dilution only serve as substitutes for short-term debt and do not affect real outcomes as they do not allow the firm to create additional collateral against which to borrow.

Asset quality, debt maturity, and market liquidity

We construct a model that endogenizes both the debt maturity choices of financial institutions and the liquidity of the asset market in a Rational Expectations Equilibrium. And we find that the decrease in asset quality can cause over-reliance on short-term debt and also lower market liquidity at the same time. Our result provides a new mechanism of market freeze and sheds light on unifiedy understanding the maturity mismatch and liquidity dry-ups of the asset market during the recent global financial crisis.

The Relation between Corporate and Government Debt Maturity in Europe

This article investigates the gap-filling explanation for corporate debt maturity choices in a multi-country setting. We argue that companies adjust their debt maturity in response to shocks in government debt maturity both at home and abroad; the difference between the two effects depends on the markets’ relative size and level of integration. Focusing on the European case and treating the Economic and Monetary Union as a shock in market integration, we find strong empirical support for our predictions. Our results have relevant implications for the opportunity for individual governments to use their debt maturity structure as a policy tool.

Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

The purpose of this study is to examine the relationship between credit rating scales and debt maturity choices. A liquidity hypothesis is used to formulate the testable proposition and conceptual framework. Generalized linear model (GLM) and pooled ordinary least square (OLS) are utilized by SAS programming to test the proposed hypothesis. Other different estimation techniques are also used for robust evidence. Results suggest that companies with high and low ratings have a shorter debt maturity. Companies with medium ratings have longer debt maturity structure. Liquidity shows a negative association with longer debt maturity structure. It is evident that at high rating scale with high liquidity, and at lower rating scales with lower liquidity firms have a shorter debt maturity. Mid rated firms with a low probability of refinancing risk show longer debt maturity structure. Considering refinancing risk by Asian companies make the nonlinear relationship between credit ratings and debt maturity choices. Results suggest the importance of credit ratings for the optimization of debt maturity structure of Asian firms, which was totally overlooked by the past studies. The findings of this study are consistent with the liquidity hypothesis. The findings also motivating financial managers and investors to consider credit ratings as a measure of financial constraints.

Capital Structure and Foreign Ownership: Evidence from China

This study provides fresh evidence on how sensitive long and short-term debts are to their financial determinants, looking at firms with different degrees of foreign ownership. Specifically, the study divides ownership into three groups, Purely Domestic, Joint Ventures and Wholly Foreign Firms and compares how their respective long-term debt and short-term debts respond to changes in their financial determinants. Wholly Foreign Firms and Joint Ventures are presumed to be more efficient and have a larger pool of cash flow compared to Purely Domestic Firms. In addition, firms with some degree of foreign ownership are presumed to be more endowed with tangible assets than firms without any degree of foreign ownership. Differences in these endowments are expected to reflect in the debt maturity choices of the different types of firms. Using ORIANA Dataset covering the period 2000-2008 on over 20,000 Chinese firms and the GMM technique, this study finds that while wholly-foreign firms and joint ventures’ short-term debt respond less to changes in cash flow compared to domestic firms’, there is no difference between how wholly-foreign firms and joint ventures long-term debt respond to changes in cash flow. Contrary to our expectations, we find that an increase in collateral will allow foreign firms to increase their long-term debt much more than Joint Ventures and Purely Domestic Firms. The implication of these results is that China’s attempt to improve its financial system has not fully gained grounds.

Debt and Asset Maturity - Do Companies Match, and If So, Why?

This study re-examines the impact of asset maturity on debt maturity choices. The pertinent literature suffers from the fact that asset maturity typically is hard to observe. In this paper we exploit the fact that for energy utilities asset maturity can directly be measured. Using a sample of 193 energy utility companies in the period 2002 to 2009 we first show that asset maturity proxies used in the literature do a fairly good job. Second, we present evidence that asset maturity is not only a statistically, but also economically significant driver for debt maturity. Third, we find that firms do not determine the maturity of newly issued debt instruments with respect to overall asset maturity, but in a way that their maturity gap is reduced. We estimate that an increase in maturity gap by one year causes the maturity of the new debt instrument to be almost four years longer than average debt maturity.

The Determinants of Corporate Debt Maturity for NSE-Listed Corporates

The maturity structure of corporate debt is one of the significant financing choices that a firm must make simultaneously while deciding how to finance its operational and investment decisions. Even though the capital structure is one of the scrutinized topics of interest in the area of corporate finance literature, there are scarce studies investigating corporate debt maturity—even less so in the context of emerging markets. The choice of a suitable debt maturity structure is extremely relevant for firms as it can enable them to avoid mismatch by aligning assets in line with liabilities, address agency related problems, sidestep the ill effects of cost of capital and signal about the firms’ earning quality and value. The study investigates the firm-specific and macroeconomic determinants that are significant for a debt maturity structure of Indian corporate firms. A sample of 29 non-financial firms listed on the National Stock Exchange during the period 2008–2016 was taken to test the hypothesis. Employing fixed effects panel data analysis, the study provides an empirical evidence that firm size, liquidity, asset maturity and base rate have significant effects on debt maturity choice in the Indian context, whereas tax effects, growth rate, firm quality and wholesale price index are not significantly related to the debt maturity structure. JEL Classification: C23, G20, G32

Institutional Quality Matter and Vietnamese Corporate Debt Maturity

Institutional Quality Matter and Vietnamese Corporate Debt Maturity

Option-Based Compensation and Corporate Debt Maturity: Evidence from FAS 123R

This paper studies the effect of risk-taking incentives provided in managerial compensation on corporate debt maturity choices. The Financial Accounting Standard (FAS) 123R is used as a quasi-natural experiment to establish causality. FAS 123R requires firms to expense stock options at fair value, which has resulted in a dramatic reduction in both option compensation and managerial risk-taking incentives. We find that treated firms significantly increased debt maturity relative to control firms. Further tests identify that the alleviation of creditor-shareholder agency conflicts due to the adoption of FAS 123R is the underlying mechanism driving the result.

Sovereign debt maturity structure under asymmetric information

This paper studies the optimal choice of sovereign debt maturity when investors are unaware of the government's willingness to repay. Under a pooling equilibrium there is a wedge between the borrower's true default risk and the default risk priced in debt, and its size differs with the maturity of debt. Safe borrowers tilt their debt maturity towards short-term – relative to the optimal choice under perfect information – since long-term debt pools more default risk that is not inherent to them. Risky borrowers mimic their behavior of safe borrowers to preclude the market from identifying their type. In times of financial distress, spreads increase and the default risk wedge of long-term debt relative to short-term debt increases, which makes borrowers shorten their debt maturity. Data on bond issuances for a panel of countries show that, consistent with the model, maturities co-vary negatively with spreads and that this co-movement is stronger in those situations in which informational asymmetries are larger.

Debt maturity and the liquidity of secondary debt markets

We model the debt maturity choice of firms in the presence of fixed issuance costs in the primary market and search frictions in the secondary market for debt. In the secondary market, short maturities improve the bargaining position of sellers, which reduces the required issuance yield. Long maturities reduce reissuance costs. The optimally chosen maturity trades off both considerations. Equilibrium exhibits inefficiently short maturity choices. An individual firm does not internalize that a longer maturity increases expected gains from trade in the secondary market, which attracts more buyers and, hence, facilitates the sale of debt issued by other firms.

Country‐level governance quality, ownership concentration, and debt maturity: A comparative study of Brazil and Chile

AbstractManuscript typeEmpiricalResearch Question/IssueThis study investigates the interplay between country‐level governance quality and the capital structure choice at the firm level in Brazil and Chile. We examine the association between a firm's ownership concentration and its debt maturity structure and whether country‐level governance quality influences this association.Research Findings/InsightsUsing a large firm‐level dataset from Brazil and Chile for the period 2008–2013, we find a positive association between low ownership concentration and debt maturity. However, this association becomes negative when the largest shareholder has high ownership concentration. This result suggests that long‐term debt and ownership concentration act as substitute monitoring mechanisms. Moreover, debt maturity is inversely related to our aggregated index of country‐level governance quality, suggesting that in countries with governance systems that effectively protect debt holders, firms with high benefits of control (high ownership concentration) will use debt with shorter repayment periods in order to benefit from frequent monitoring by debt holders. Overall, our results support the view that financial markets tend to pressure firms with high benefits of control or greater agency conflict to make a tradeoff between the benefits of control and the cost and maturity structure of debt financing.Theoretical/Academic ImplicationsThis study contributes to the research on comparative corporate governance and capital structure. We also respond to recent calls to bridge the gap between under‐ and over‐socialized views of corporate governance by examining the interplay between firm‐ and country‐level governance variables. Our findings suggest a substitution effect between monitoring by equity holders and by debt holders, and that country‐level governance quality exerts a disciplinary influence over a firm's choice of debt maturity structure.Practitioner/Policy ImplicationsInvestors seeking to enter emerging markets such as Brazil and Chile can benefit from considering national governance factors that enhance debt holders’ external monitoring effectiveness. Because our findings show the importance of considering and improving the quality of country‐level governance, they are also useful for policy makers aiming to reform corporate governance practices in emerging markets.