Dynamic Debt Maturity

Zhiguo He () and Konstantin Milbradt

No 21919, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A firm chooses its debt maturity structure and default timing dynamically, both without commitment. Via the fraction of newly issued short-term bonds, equity holders control the maturity structure, which affects their endogenous default decision. A shortening equilibrium with accelerated default emerges when cash-flows deteriorate over time so that debt recovery is higher if default occurs earlier. Self-enforcing shortening and lengthening equilibria may co-exist, with the latter possibly Pareto-dominating the former. The inability to commit to issuance policies can worsen the Leland-problem of the inability to commit to a default policy—a self-fulfilling shortening spiral and adverse default policy may arise.

JEL-codes: G0 G01 G3 G30 G32 G33 (search for similar items in EconPapers)
Date: 2016-01
Note: AP CF
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Citations: View citations in EconPapers (32)

Published as Zhiguo He & Konstantin Milbradt, 2016. "Dynamic Debt Maturity," Review of Financial Studies, vol 29(10), pages 2677-2736.

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Journal Article: Dynamic Debt Maturity (2016)
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