NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Maturity Rationing and Collective Short-Termism

Konstantin Milbradt, Martin Oehmke

NBER Working Paper No. 19946
Issued in February 2014
NBER Program(s):   CF

Financing terms and investment decisions are jointly determined. This interdependence links firms’ asset and liability sides and can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investment opportunities are long-term may change their investments towards second-best projects of shorter maturities. This worsens financing terms for firms with shorter maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

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Document Object Identifier (DOI): 10.3386/w19946

Forthcoming: Maturity Rationing and Collective Short-Termism, Konstantin Milbradt, Martin Oehmke. in Understanding the Capital Structures of Non-Financial and Financial Corporations, Acharya, Almeida, and Baker. 2014

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