Debt maturity of different types of debt

Abstract

This paper documents the different debt maturity choices of firms by allowing debt heterogeneity. We use a sample of US companies’ capital structure and employ dynamic panel regressions and Instrumental Variable approach. When taking the maturity of each type of debt into account, the researcher fails to validate the non-linear relationship between credit quality (firm size) and debt maturity predicted by Diamond in 1991. This study finds a non-linear relationship between revolving credit, term loan, and capital leases but does not find the same relationship with bonds and notes or trust preferred securities. Also, this research finds that different types of debt are explained differently by existing debt maturity theory such as information asymmetry, agency cost of debt, signaling, tax, matching asset maturity, and timing the market hypothesis.

Impact statement

The findings of this paper shed light on the intricate dynamics of debt maturity choices among firms, challenging existing theoretical frameworks. By meticulously examining a diverse array of debt instruments within US companies’ capital structures, the study unveils a nuanced non-linear relationship between credit quality (proxied by firm size) and debt maturity, contrary to Diamond’s seminal work. Notably, the research delineates varying patterns across different types of debt, revealing distinctive relationships for revolving credit, term loans, and capital leases compared to bonds, notes, or trust preferred securities. Moreover, the study enriches our understanding of debt maturity determinants by dissecting the influence of factors such as information asymmetry, agency costs, signaling, tax considerations, asset maturity matching, and market timing hypotheses. These findings not only contribute to the refinement of debt maturity theories but also offer valuable insights for practitioners navigating capital structure decisions in dynamic economic landscapes.

Keywords:

• Capital structure
• debt maturity
• debt choice

REVIEWING EDITOR:

• David McMillan
• University of Stirling
• United Kingdom

SUBJECTS:

• Economics
• finance
• business
• management and accounting

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data access statement

The data that support the findings of this study are available from the corresponding author, YL, upon reasonable request.

Notes

1 The underinvestment problem refers to a situation where a firm with existing debt may forgo or underinvest in positive net present value (NPV) projects. This occurs because the benefits of the investment accrue more to the bondholders rather than the shareholders if the firm is in financial distress or has a high level of debt.

2 We use Maturity Year High variable as the maturity year. Capital IQ indicates that Maturity Year High represents the year of the high end of the maturity range when the maturity of a debt is given as a range instead of a single value. We select Maturity Year High because (1) Capital IQ has almost all Maturity Year High values in its database; and (2) we consider it as the longest maturity that firms can achieve.

3 We run the regression with firm size proxied by the ln(Market Capitalization). The results do not change significantly.

Additional information

Notes on contributors

Yuree Lim

Yuree Lim is an assistant professor of Finance at Texas Woman’s University. Her research deals with issues in Corporate, Behavioral and Household Finance. She has published papers in the Journal of Financial and Quantitative Analysis and Quarterly Journal of Finance. She received her PhD in Finance from the University of Alabama in 2016.