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A Gap‐Filling Theory of Corporate Debt Maturity Choice
Author(s) -
GREENWOOD ROBIN,
HANSON SAMUEL,
STEIN JEREMY C.
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01559.x
Subject(s) - maturity (psychological) , market liquidity , debt , government debt , monetary economics , internal debt , debt levels and flows , business , debt to gdp ratio , government (linguistics) , funding liquidity , debt ratio , economics , financial system , liquidity crisis , finance , psychology , developmental psychology , linguistics , philosophy
We argue that time variation in the maturity of corporate debt arises because firms behave as macro liquidity providers, absorbing the supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with more short‐term debt, firms fill the resulting gap by issuing more long‐term debt, and vice versa. This type of liquidity provision is undertaken more aggressively: (1) when the ratio of government debt to total debt is higher and (2) by firms with stronger balance sheets. Our theory sheds new light on market timing phenomena in corporate finance more generally.