Systematic risk,debt maturity,and the term structure of credit spreads |
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| Authors: | Hui Chen Yu Xu Jun Yang |
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| Institution: | 1. MIT Sloan and NBER, 77 Massachusetts Avenue, Cambridge, MA 02139, USA;2. Lerner College of Business and Economics, University of Delaware, 20 Orchard Rd, Newark, DE 19716, USA;3. Bank of Canada, 234 Wellington Street, Ottawa, ON K1A 0G9, Canada;1. Erasmus Scchool of Economics - Burgemeester Oudlaan 50, Erasmus University Rotterdam, Rotterdam PA 3062, the Netherlands;2. Tilburg University - Warandelaan 2, Tilburg AB 5037, the Netherlands;1. Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St NE, Atlanta, GA 30309, United States;2. Warwick Business School, The University of Warwick, Coventry CV4 7AL, United Kingdom;1. Harvard Business School, United States;2. Princeton University, United States;1. Stanford Law School, 559 Nathan Abbott Way, Stanford, CA 94305, United States;2. Opportunity Insights, Harvard University, 1280 Massachusetts Ave, 2nd Floor, Cambridge, MA 02138, United States |
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| Abstract: | 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. |
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