Working Paper: CEPR ID: DP14570
Authors: Josef Zechner; Maria Chaderina; Patrick Weiss
Abstract: This paper shows that firms with longer debt maturities earn risk premia not explainedby unconditional standard factor models. We develop a dynamic capital structuremodel and find that firms with long-term debt exhibit more countercyclical leverage,making them more highly levered in downturns, when the market price of risk is high.The induced covariance between risk exposure and the market price of risk generatesa maturity premium which we estimate at 0.21% per month. Empirical results from aconditional CAPM as well as observed beta dynamics are consistent with the model.We also exploit exogenous variation of debt maturities at the onset of the financialcrisis and find that firms with shorter debt maturities experienced a smaller increase inleverage during the crisis. Also, after an initial spike, the betas of short-maturity firmsreverted to levels below those of long-maturity firms by the end of 2008.
Keywords: maturity; value premium; debt overhang; cross-section of stock returns; CAPM
JEL Codes: G12; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms with longer debt maturities (G32) | higher risk premia (G19) |
| longer debt maturities (F34) | more countercyclical leverage (E44) |
| higher leverage (G32) | higher maturity premium (G19) |
| lower corporate profitability (L21) | reluctance of shareholders to repurchase debt (G32) |
| reluctance of shareholders to repurchase debt (G32) | slower reduction in leverage (G32) |
| slower reduction in leverage (G32) | higher covariance between risk exposure and market price of risk (G19) |
| higher covariance between risk exposure and market price of risk (G19) | maturity premium (G19) |
| firms with shorter debt maturities (G32) | smaller increase in leverage during crises (F65) |
| shorter debt maturities (G32) | betas revert to lower levels quickly (C46) |
| highly leveraged firms (G32) | pronounced maturity premium (G19) |