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Dynamic debt maturity, Review of Financial Studies

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.

Type

Article

Author(s)

Konstantin Milbradt, Zhiguo He

Date Published

2016

Citations

Milbradt, Konstantin, and Zhiguo He. 2016. Dynamic debt maturity. Review of Financial Studies. 29(10): 2677-2736.

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