Maturity Rationing and Collective Short-Termism / Konstantin Milbradt, Martin Oehmke.

Format:

Book

Author/Creator:

Milbradt, Konstantin.

Contributor:

National Bureau of Economic Research.

Oehmke, Martin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19946.

NBER working paper series no. w19946

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

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.

Notes:

Print version record

February 2014.