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The Maturity Rat Race
Author(s) -
BRUNNERMEIER MARKUS K.,
OEHMKE MARTIN
Publication year - 2013
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/jofi.12005
Subject(s) - maturity (psychological) , creditor , interim , commit , incentive , business , debt , term (time) , monetary economics , finance , economics , actuarial science , microeconomics , computer science , psychology , developmental psychology , physics , archaeology , quantum mechanics , database , history
Why do some firms, especially financial institutions, finance themselves so short‐term? We show that extreme reliance on short‐term financing may be the outcome of a maturity rat race : a borrower may have an incentive to shorten the maturity of an individual creditor's debt contract because this dilutes other creditors. In response, other creditors opt for shorter maturity contracts as well. This dynamic toward short maturities is present whenever interim information is mostly about the probability of default rather than the recovery in default. For borrowers that cannot commit to a maturity structure, equilibrium financing is inefficiently short‐term.