A theory of multi-period debt structure

Huang, Chong, Oehmke, Martin and Zhong, Hongda (2018) A theory of multi-period debt structure. Review of Financial Studies. ISSN 0893-9454 (In Press)

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Abstract

We develop a theory of multi-period debt structure. A simple trade-off between the termination threat required to make repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and repayment amounts. As firms increase their borrowing, they add periodic risky repayments from the back of the maturity structure, with the time between repayments increasing in cash-flow risk. Cash-flow growth or a significant risk-free cash-flow component limit the number of periodic risky repayments. Firms with significant risk-free cash-flow component choose dispersed maturity profiles with relatively safe repayments every period, rather than riskier, periodic repayments.

Item Type:	Article
Official URL:	https://academic.oup.com/rfs
Additional Information:	© 2018 Oxford University Press
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Sets:	Departments > Finance
Date Deposited:	16 Oct 2018 13:13
Last Modified:	20 Feb 2019 06:55
URI:	http://eprints.lse.ac.uk/id/eprint/90429

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