Working Paper: NBER ID: w14727
Authors: Markus K. Brunnermeier; Motohiro Yogo
Abstract: 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.
Keywords: liquidity risk; debt maturity; financial health; rollover risk
JEL Codes: G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal maturity structure of debt (G32) | firm's ability to manage liquidity risk effectively (G33) |
| short-term financing (G32) | flexibility in adjusting to asset value changes (G11) |
| failing to roll over bonds (G12) | costly debt restructuring (G32) |
| costly debt restructuring (G32) | firm value (G32) |
| rollover risk (G11) | financial distress (G33) |
| holding excess cash reserves (G31) | rollover risk (G11) |
| optimal maturity structure for debt (G32) | rollover risk (G11) |
| maturity structure (G32) | firm's net worth (G32) |
| maturity structure (G32) | borrowing capacity (H74) |