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T. Dangl, J. Zechner:
"Debt Maturity and the Dynamics of Leverage";
Review of Financial Studies, 34 (2021), 12; S. 5796 - 5840.

This paper shows that short debt maturities commit equityholders to leverage reductions
when refinancing expiring debt in low-profitability states. However, shorter maturities lead
to higher transaction costs since larger amounts of expiring debt need to be refinanced. We
show that this trade-off between higher expected transaction costs against the commitment
to reduce leverage in low-profitability states motivates an optimal maturity structure of
corporate debt. Since firms with high costs of financial distress and risky cash flows benefit
most from committing to leverage reductions, they have a stronger motive to issue short-term
debt. Evidence supports the model´s predictions.

Corporate finance, capital structure choice

http://dx.doi.org/10.1093/rfs/hhaa148

https://publik.tuwien.ac.at/files/publik_302576.pdf