A Theory of Debt Maturity: The Long and Short of Debt Overhang

A Theory of Debt Maturity: The Long and Short of Debt Overhang

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 vol...

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Bibliographic Details
Published in:The Journal of finance (New York) Vol. 69; no. 2; pp. 719 - 762
Main Authors: DIAMOND, DOUGLAS W., HE, ZHIGUO
Format: Journal Article
Language:English
Published: Cambridge Blackwell Publishing Ltd 01-04-2014
Wiley Periodicals,Inc
Blackwell Publishers Inc
Subjects:
Correlation
Correlation analysis
Debt
Debt management
Debt refinancing
Financial instruments
Financial investments
Firm value
Incentives
Investment analysis
Investment policy
Investment value
Loan defaults
Long term debt
Long term investments
Maturity
Short term debt
Short term investments
Studies
Volatility
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Summary: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.
Bibliography:ark:/67375/WNG-RX62CRR9-K
ArticleID:JOFI12118
National Science Foundation - No. 0962321
istex:05C197868FF9C3B32A988164ED130D9DB6A540E2
Douglas W. Diamond and Zhiguo He are with Booth School of Business, University of Chicago, and NBER. The authors gratefully acknowledge research support from the Center for Research in Security Prices at Chicago Booth. Diamond gratefully acknowledges support from the National Science Foundation under award number 0962321. They thank two referees, seminar participants at MIT Sloan, OSU Fisher, Chicago Booth, Columbia, Yale, Harvard, UCLA, NBER 2010 Corporate Finance meeting in Chicago, AFA 2011 in Denver, Southern Methodist University, NYU Stern, Nittai Bergman, Hui Chen, Victoria Ivashina, Gustavo Manso, Gregor Matvos, Henri Pages, Raghu Rajan, Berk Sensoy, Jeremy Stein, Rene Stulz, Sheridan Titman, and especially Stewart Myers and Charles Kahn for insightful comments.
ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12118