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Debt maturity and the liquidity of secondary debt markets

Author

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  • Bruche, Max
  • Segura, Anatoli
Abstract
We develop an equilibrium model of debt maturity choice of firms, in the presence of fixed issuance costs in primary debt markets, and an over-the-counter secondary debt market with search frictions. Liquidity in this market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of debtholders who sell in the secondary market and hence reduce the interest rate that firms need to offer on debt. Long maturities reduce re-issuance costs. The optimally chosen maturity trades of both considerations. Firms individually do not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms. As a result, the laissez-faire equilibrium exhibits inefficiently short maturity choices. Empirical implications of the model include that issuance yields and bid-ask spreads should be increasing in maturity.

Suggested Citation

  • Bruche, Max & Segura, Anatoli, 2013. "Debt maturity and the liquidity of secondary debt markets," LSE Research Online Documents on Economics 55404, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:55404
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    File URL: http://eprints.lse.ac.uk/55404/
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    3. David M. Arseneau & David E. Rappoport & Alexandros Vardoulakis, 2015. "Secondary Market Liquidity and the Optimal Capital Structure," Finance and Economics Discussion Series 2015-31, Board of Governors of the Federal Reserve System (U.S.).
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    5. Arseneau, David M. & Rappoport W., David E. & Vardoulakis, Alexandros P., 2020. "Private and public liquidity provision in over-the-counter markets," Theoretical Economics, Econometric Society, vol. 15(4), November.
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    8. Cortina Lorente,Juan Jose & Didier Brandao,Tatiana & Schmukler,Sergio L. & Cortina Lorente,Juan Jose & Didier Brandao,Tatiana & Schmukler,Sergio L., 2016. "Corporate borrowing and debt maturity : the effects of market access and crises," Policy Research Working Paper Series 7815, The World Bank.
    9. Chen, Rongda & Zhou, Hanxian & Jin, Chenglu & Liu, Jia, 2020. "Discount or premium? Pricing of structured products: An analysis of Chinese market," International Review of Financial Analysis, Elsevier, vol. 70(C).
    10. Su, Tong & Lin, Boqiang, 2022. "The liquidity impact of Chinese green bonds spreads," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 318-334.
    11. Zhou, Yimin & Wei, Xu, 2023. "Bond liquidity, debt maturity and bond risk premium," Finance Research Letters, Elsevier, vol. 54(C).
    12. Donaldson, Jason & Piacentino, Giorgia, 2019. "Money Runs," CEPR Discussion Papers 13955, C.E.P.R. Discussion Papers.
    13. Anatoli Segura & Javier Suarez, 2017. "How Excessive Is Banks’ Maturity Transformation?," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3538-3580.
    14. Wang, Qin (Emma) & Zhang, Jun, 2023. "Local institutional investors and debt maturity," Journal of Financial Markets, Elsevier, vol. 62(C).
    15. Hasan, Mostafa Monzur & Asad, Suzona & Wong, Jin Boon, 2022. "Oil price uncertainty and corporate debt maturity structure," Finance Research Letters, Elsevier, vol. 46(PA).
    16. Wei, Xu & Xiao, Xiao & Zhou, Yi & Zhou, Yimin, 2023. "Spillover effects between liquidity risks through endogenous debt maturity," Journal of Financial Markets, Elsevier, vol. 64(C).
    17. Paseda, Oluseun & Olowe, Rufus, 2018. "The Debt Maturity Structure of Nigerian Quoted Firms," MPRA Paper 117061, University Library of Munich, Germany, revised 30 Jun 2018.
    18. Donaldson, Jason Roderick & Piacentino, Giorgia, 2022. "Money runs," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 35-57.
    19. Gong, Yaxian & Wei, Xu, 2019. "Asset quality, debt maturity, and market liquidity," Finance Research Letters, Elsevier, vol. 31(C).
    20. Julian Kozlowski, 2017. "Long-Term Finance and Economic Development: The Role of Liquidity in Corporate Debt Markets," 2017 Meeting Papers 699, Society for Economic Dynamics.
    21. Jason R. Donaldson & Giorgia Piacentino, 2019. "Money Runs," NBER Working Papers 26298, National Bureau of Economic Research, Inc.
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    23. Lorenzo Burlon & Davide Fantino & Andrea Nobili & Gabriele Sene, 2016. "The quantity of corporate credit rationing with matched bank-firm data," Temi di discussione (Economic working papers) 1058, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    debt maturity; search; liquidity.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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