When a firm is unable to roll over its debt, it may have to seek more expensive sources of financing or even liquidate its assets. This paper provides a normative analysis of minimizing such rollover risk, through the optimal dynamic choice of the maturity structure of debt. The objective of a firm with long-term assets is to maximize the effective maturity of its liabilities across several refinancing cycles, rather than to maximize the maturity of the current bonds outstanding. An advantage of short-term financing is that a firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value.
Published: Markus K. Brunnermeier & Motohiro Yogo, 2009.
"A Note on Liquidity Risk Management,"
American Economic Review,
American Economic Association, vol. 99(2), pages 578-83, May.
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This paper was revised on December 5, 2011
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