Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads / Hui Chen, Yu Xu, Jun Yang.

Format:

Book

Author/Creator:

Chen, Hui.

Contributor:

National Bureau of Economic Research.

Xu, Yu.

Yang, Jun.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18367.

NBER working paper series no. w18367

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

We build a dynamic capital structure model to study the link between firms' systematic risk exposures and their time-varying debt maturity choices, as well as its implications for the term structure of credit spreads. Compared to short-term debt, long-term debt helps reduce rollover risks, but its illiquidity raises the costs of financing. With both default risk and liquidity costs changing over the business cycle, our calibrated model implies that debt maturity is pro-cyclical, firms with high systematic risk favor longer debt maturity, and that these firms will have more stable maturity structures over the cycle. Moreover, pro-cyclical maturity variation can significantly amplify the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high beta, high leverage, or a lumpy maturity structure. We provide empirical evidence for the model predictions on both debt maturity and credit spreads.

Notes:

Print version record

September 2012.