NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dynamic Debt Maturity

Zhiguo He, Konstantin Milbradt

NBER Working Paper No. 21919
Issued in January 2016
NBER Program(s):AP, CF

A firm chooses its debt maturity structure and default timing dynamically, both without commitment. Via the fraction of newly issued short-term bonds, equity holders control the maturity structure, which affects their endogenous default decision. A shortening equilibrium with accelerated default emerges when cash-flows deteriorate over time so that debt recovery is higher if default occurs earlier. Self-enforcing shortening and lengthening equilibria may co-exist, with the latter possibly Pareto-dominating the former. The inability to commit to issuance policies can worsen the Leland-problem of the inability to commit to a default policy—a self-fulfilling shortening spiral and adverse default policy may arise.

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Document Object Identifier (DOI): 10.3386/w21919

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