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A Theory of Debt Maturity: The Long and Short of Debt Overhang
Author(s) -
DIAMOND DOUGLAS W.,
HE ZHIGUO
Publication year - 2014
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.12118
Subject(s) - debt overhang , debt , monetary economics , internal debt , debt to gdp ratio , recourse debt , external debt , debt levels and flows , debt ratio , economics , volatility (finance) , incentive , maturity (psychological) , finance , microeconomics , psychology , developmental psychology
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.