Maturity rationing and collective short-termism

Milbradt, Konstantin and Oehmke, Martin ORCID: 0000-0001-9902-0711 (2015) Maturity rationing and collective short-termism. Journal of Financial Economics, 118 (3). 553 - 570. ISSN 0304-405X

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Abstract

Financing terms and investment decisions are jointly determined. This interdependence, which links firms׳ asset and liability sides, can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investments are long-term may adopt second-best projects of shorter maturities. This worsens financing terms for firms with shorter-maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-f...
Additional Information:	© 2014 Elsevier B.V
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	09 Oct 2017 13:54
Last Modified:	12 Dec 2024 01:02
URI:	http://eprints.lse.ac.uk/id/eprint/84513

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