Debt Maturity Structure and Firm Investment

This study shows that the maturity structure of a firm's debt has a significant impact on its investment decisions. We show, after controlling for the effect of the overall level of leverage, that a higher percentage of long-term debt in total debt significantly reduces investment for firms with high growth opportunities. In contrast, the correlation between debt maturity and investment is not significant for firms with low growth opportunities. The results are strong at the firm level and at the business segment level. These results hold even after controlling for the endogeneity problem inherent in the relationship between total leverage, the maturity composition of leverage, and investment.     

Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.     

The Determination of the Seniority Structure of Debt: Theory and Evidence

The purposes of this paper are to provide a theory of determining the firm's optimal seniority structure of debt and examine the relation between the firm's seniority structure of debt and its characteristics. Unlike previous studies, we develop a theoretical model which explicitly includes the benefits and costs associated with senior debt financing, corporate taxes, risk-aversion in the capital market, and costs of financial distress. We next show how a value-maximized firm searches for the optimal trade-off among the present values of the tax advantage of debt, loss of tax credits, expected costs of financial distress, costs of senior debt financing, and benefit of limited liability. Numerical analysis results show that the firm's value is not only a strictly concave function of its capital structure (with a unique global maximum), but also a strictly concave function of its mix of senior and junior debts (with a unique global maximum). We then show that a firm's optimal seniority structure of debt (i.e. the market value of senior debt divided by the sum of the market values of senior and junior debts) increases for low levels of asset riskiness and decreases when asset riskiness becomes sufficiently great. Our model also suggests that a firm's optimal seniority structure of debt increases for low levels of growth opportunities and decreases for high levels of growth opportunities. We test the predictions of our model on the relation between the firm's seniority structure of debt and its characteristics by using the data for the firms in COMPUSTAT over the 1972 through 1991 time period. The empirical evidence is consistent with our theoretical predictions.     

How Entrenchment, Incentives and Governance Influence REIT Capital Structure

Although recent literature has confirmed the importance of viewing a firm??s capital structure choices of leverage and debt maturity as jointly determined, to date there has been little analysis of the importance of traditional governance variables on a firm??s capital structure decisions using a simultaneous equations approach. We examine the influence of managerial incentives, traditional managerial monitoring mechanisms and managerial entrenchment on the capital structure of Real Estate Investment Trusts (REITs). Using panel data, we estimate a system of simultaneous equations for leverage and maturity and find that firms with entrenched CEOs use less leverage and shorter maturity debt. This is consistent with the expectation that managers acting in their own self interest will choose lower leverage to reduce liquidity risk and use short maturity debt to preserve their ability to enhance their compensation and reputations by empire building. We also find evidence that traditional alignment mechanisms such as equity and option ownership have an offsetting effect; and that firms where the founder serves as CEO choose higher leverage and longer maturity debt. The results also provide evidence that leverage and maturity are substitutes, firms with high profitability and growth opportunities use less leverage and firms with liquid assets use more leverage and longer maturity debt.     

An empirical analysis of corporate debt maturity structure

This paper provides an empirical investigation of the maturity structure of corporate debt. A dynamic model is estimated by GMM estimation procedure using data for an unbalanced panel of 429 non-financial UK firms over the period of 1983–96. The evidence provides strong support for the hypotheses that firms with more growth opportunities in their investment sets tend to have more shorter-term debt and firm size exerts a negative impact on debt maturity structure. The results also support the maturity-matching hypothesis that firms match the maturity structure of their debt to the maturity of their assets. There is less support for the view that firms use their debt maturity structure to signal information to the market. We do not find evidence for a negative correlation between taxes and debt maturity. Our results also suggest that firms have long-term target ratios and they adjust to the target ratio relatively fast, which might indicate that the costs of being away from target ratios are significant for firms.     

Does debt capacity matter in the choice of debt in reducing the underinvestment problem?

We test the impact of debt capacity on firms’ simultaneous decisions of leverage and debt maturity in reducing underinvestment problems. Examining 24 OECD countries for the period between 1990 and 2011, we find strong evidence, that, unlike previous studies, the role of leverage and debt maturity in reducing underinvestment problems is not homogeneous across firms with varied debt capacity. We find new evidence that, when firms face lower debt capacity constraints, they benefit from their ability to use a greater amount of debt if they shorten their debt maturity, or gain from using longer maturity of debt if they decrease their leverage to reduce underinvestment problems. Our results suggest that they also benefit from the ability of their firms to gain from interest tax shields by financing more with debt or long-term debt, and hence use debt maturity and leverage as strategies substitutes. However, when firms are constrained by concerns over debt capacity, they tend to opt for a lower level of debt that is mainly short-term to reduce the underinvestment problem. Our results suggest that firms with lower debt capacity cannot completely resolve their underinvestment problems by using short-term debt or low leverage, implying that the effects of the liquidity risk outweigh those of underinvestment problems, and hence impose a constraint on firms’ choice of debt.     

Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage

I test the hypothesis that short debt maturity attenuates thenegative effect of growth opportunities on leverage. Using simultaneousequations with leverage and maturity endogenous, I find strongsupport for an economically significant attenuation effect.The negative effect of growth opportunities on leverage forfirms with all shorter-term debt is less than one-sixth as largeas the effect for firms with all longer-term debt. Short maturityalso increases liquidity risk, however, which negatively affectsleverage. The results suggest that firms trade off the costof underinvestment problems against the cost of liquidity riskwhen choosing short maturity.     

Debt Structure Adjustments and Long-Run Stock Price Performance

We examine the long-run implications of debt structure adjustments using a sample of U.S. bond IPOs from 1971 to 1994. Bond IPOs result in simultaneous and pronounced changes in both debt maturity and debt ownership structures. We document that firms engaging in debt IPOs substantially underperform their size-and-book-to-market-matched benchmarks by 33.39 and 55.99% over the 3- and 5-year post-offer periods. Our results are strikingly similar to those reported for equity offers but contrast the evidence for seasoned debt offers. We find evidence that debt IPOs are timed to coincide with the market having the highest expectations concerning firms' prospects. A negative relation is documented between debt maturity and future growth opportunities. In part, the underperformance can be attributed to significantly reduced growth opportunities following the offering. Post-offer underperformance is more pronounced for (a) longer maturity issues and (b) firms that do not experience an increase in bank monitoring. Journal of Economic Literature Classification Numbers: G12, G24, G30, D82.     

Managerial Stock Ownership and the Maturity Structure of Corporate Debt

This study documents that managerial stock ownership plays an important role in determining corporate debt maturity. Controlling for previously identified determinants of debt maturity and modeling leverage and debt maturity as jointly endogenous, we document a significant and robust inverse relation between managerial stock ownership and corporate debt maturity. We also show that managerial stock ownership influences the relation between credit quality and debt maturity and between growth opportunities and debt maturity.     

Some Evidence on the Uniqueness of Initial Public Debt Offerings

Debt initial public offerings (IPOs) represent a major shift in a firm's financing policy by both extending debt maturity and altering the public-private debt mix. In contrast to findings for seasoned debt offerings, we document a significantly negative stock price response to debt IPO announcements. This result is consistent with debt maturity and debt ownership structure theories. The equity wealth effect is negatively related to the offer's maturity, and positively related to the degree of bank monitoring. We find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response.     

Leverage and investment under a state-owned bank lending environment: Evidence from China

This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an overinvestment bias in these firms.     

The Determinants of Debt Maturity: The Case of Bank Financing in Singapore

This study presents important international evidence by examining the determinants of debt maturity of listed firms in Singapore, a major financial center in Asia. We focus on bank debt because it is the principal source of financing for most Singapore firms. We find that consistent with the contracting-cost hypothesis, firms with greater growth opportunities rely more heavily on short-term bank debt whereas larger firms are more likely to use long-term bank debt. In contrast, we find no strong support for either the tax or signaling hypotheses.     

Determinants of Bank Debt in a Continental Financial System: Evidence from Spanish Companies

We test hypotheses about the structure of corporate debt ownership and the use of bank debt by firms in a civil‐law country, Spain. We focus on bank debt effects in the presence of information asymmetries and agency costs, and on efficient versus inefficient firm liquidation. We find that the relation between growth opportunities and bank financing is not as strong as the one found in common‐law countries, that there is a positive relation between firm size and the proportion of bank debt used, and that firms closer to bankruptcy and highly leveraged are more likely to use bank debt.     

减税政策对小微企业债务期限结构的影响

本文主要探讨减税政策对小微企业债务期限结构的影响。理论上,减税政策对企业债务期限结构产生两种方向相反的效果:一是减税后企业盈利状况改善,激励银行通过延长债务期限以争取企业客户;二是减税后企业可支配现金流增加,加剧银行与企业间的委托代理问题,促使银行缩短债务期限以便加强企业监督。本文以所得税减半征收政策作为自然实验,基于全国税收调查数据库(2010-2015)考察了减税政策对小微企业债务期限结构的影响。实证结果显示:减税后企业的债务期限整体得以延长;如果减税后企业的盈利状况改善更多,或可支配现金流增长更缓,企业债务期限延长幅度更大。此外,本文发现在快速扩张行业、有产能过剩风险行业以及房地产上下游关联行业中的企业往往会因为较强的代理成本效应而面临减税后债务期限的边际缩短。本文研究结论对改善企业融资结构,特别对提高小微企业获取中长期贷款能力,有一定的参考意义。     

Idiosyncratic risk and debt maturity dispersion

We investigate the relation between idiosyncratic asset risk and debt maturity dispersion. Idiosyncratic asset volatility represents significant risk, which can impede the ability to obtain or maintain external debt financing necessary for business operations, and is difficult to control given its unpredictable nature. We find that this risk is managed through the maturity structure of debt: firms with higher idiosyncratic asset volatility also have more dispersed maturity structures. Consistent with active management of rollover risk, this relation is weaker for younger firms and stronger for firms without significant credit lines.     

The Determinants of Foreign Currency Hedging: Does Foreign Currency Debt Induce a Bias?

In this paper we use UK data to present strong empirical evidence that explains the mixed results in previous studies with respect to the effect of financial distress on the demand for corporate hedging. We build on recent studies that have identified a strong link between foreign currency (FC) debt use and leverage. Given this relationship, we show that using leverage variables as proxies for financial distress and the failure to distinguish between FC debt users and non‐users causes misleading inference. More specifically, when we partition our sample of FC hedgers into firms that use and do not use foreign debt, we show that leverage variables are significantly related to the FC hedging decision for firms that use FC debt either in isolation or in combination with FC derivatives but not for firms that only use FC derivatives. This suggests that FC debt users are influencing these results. However, we also find that other financial distress cost proxies with no obvious link to FC debt use are significant determinants in the corporate demand for FC hedging, including derivatives use.     

The joint determinants of cash holdings and debt maturity: the case for financial constraints

We examine the joint choices of cash holdings and debt maturity for a large sample of firms for the 1985–2013 period. We find that there is a positive relation between debt maturity and cash holdings. Our results hold after taking into account endogeneity among leverage, debt maturity, and cash holding. We posit that this positive relationship will be found among firms facing financial constraints and we find support for this hypothesis. Our results are robust after we control for agency problems, international taxation, bank loan liquidity covenants and default risk.     

Investment opportunities,free cash flow,and stock valuation effects of secured debt offerings

This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues.

Systematic risk,debt maturity,and the term structure of credit spreads

We document several facts about corporate debt maturity: (1) debt maturity is pro-cyclical, (2) higher-beta firms tend to have longer maturity, and (3) shorter maturity amplifies the sensitivity of credit spreads to aggregate shocks. We present a dynamic capital structure model that explains these facts. In the model, leverage and maturity choices are interdependent, which reflect the tradeoffs of liquidity discounts of long-term debt, repayment risks of short-term debt, and the benefit of short-term debt as a commitment device for timely leverage adjustments. Additionally, the model helps quantify the effects of maturity dynamics on the term structure of credit spreads.     

An Integrated Model of Debt Issuance, Refunding, and Maturity

We integrate previous work in this area and develop a multiperiod model that simultaneously determines bond refunding, bond issuance, maturity structure, cash holdings, and bank borrowing policies. The focus here is on providing the required debt funds in the most cost efficient fashion. A strength of the model is that it allows for time varying interest costs, transaction costs, issuance costs, and refunding costs to be firm specific. The output of the model lays out the optimal financing decisions for each time interval that minimize the total discounted cost of providing the funds that match the requisite funds. By limiting the surplus funds available, the model minimizes the management incentive to over invest and thereby reduces the agency costs. The model has economic implications for the financing decisions and the firm's default risk, growth opportunities, riskiness of cash flows, and firm size. JEL Classification: G30