A Theory of Debt Maturity: The Long and Short of Debt Overhang
Year: 2013
Type: article
Abstract: ABSTRACT Debt maturity influences debt overhang, the reduced incentive for highly levered borrowers to make real investments because some value accrues to debt. Reducing maturity can increase or decrease overhang even when shorter term debt's value depends less on firm value. Future overhang is more volatile for shorter term debt, making future investment incentives volatile and influencing immediate investment incentives. With immediate investment, shorter term debt typically imposes lower overhang; longer term debt can impose less if asset volatility is higher in bad times. For future investments, reduced correlation between assets‐in‐place and investment opportunities increases the shorter term debt overhang.
Source: The Journal of Finance
DOI: 10.1111/jofi.12118
Authors: DOUGLAS W. DIAMOND, ZHIGUO HE
Institutions: University of California, Los Angeles, University of Chicago
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2595255354