Title: (Idiosyncratic) Credit-spread Risk and the Dynamics of Liquidity, Leverage and Maturity of Debt
Abstract: I study the joint dynamics of leverage, maturity and liquidity choices of a firm. Long-term debt is safer as it limits the firm’s exposure to roll-over losses driven by credit-spread risk, but short-term debt gives firms more flexibility in reducing leverage. As a result, firms have positive cash and debt balances, firms closer to default prefer short-term debt, relation between leverage and maturity is positive, and maturity structure is non-evenly spread-out. Higher volatility of cash flows makes firms riskier and they opt for shorter-maturity debt, while higher idiosyncratic volatility of credit spreads makes firms chose longer-term borrowing and higher cash balances.
Publication Year: 2016
Publication Date: 2016-11-04
Language: en
Type: article
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Cited By Count: 2
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