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