Research Details

Abstract

Financing terms and investment decisions are jointly determined. This interdependence, which links firms’ asset and liability sides, can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investments are long-term may adopt second-best projects of shorter maturities. This worsens financing terms for firms with shorter-maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

Type

Article

Author(s)

Konstantin Milbradt, Martin Oehmke

Date Published

2015

Citations

Milbradt, Konstantin, and Martin Oehmke. 2015. Maturity Rationing and Collective Short-Termism. Journal of Financial Economics.(3): 553-570.