Dynamic Debt Maturity / Zhiguo He, Konstantin Milbradt.

Format:

Book

Author/Creator:

He, Zhiguo.

Contributor:

National Bureau of Economic Research.

Milbradt, Konstantin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21919.

NBER working paper series no. w21919

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

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.

Notes:

Print version record

January 2016.