Johannes Pöschl, Danmarks Nationalbank
"Corporate Debt Maturity and Investment over the Business Cycle"
I document that the share of long-term debt in total debt of US non-financial firms is pro-cyclical. Furthermore, the long-term debt share of small firms has a higher standard deviation and correlation with output than the long-term debt share of large firms. I construct a quantitative model in which firms optimally choose investment, leverage, debt maturity, dividends, and default.
Firms face idiosyncratic and aggregate risk. When they choose their debt maturity, firms trade ofdefault premia and roll-over costs. As a result, financially constrained firms endogenously prefer to issue short-term debt, because they face high default premia on long-term debt. Financially unconstrained firms issue long-term debt, because it has lower roll-over costs. The model, which is parameterized to match cross-sectional moments, can match stylized facts about the level and dynamics of the maturity structure of debt both in the aggregate and along the firm size distribution. Regarding the effects of outstanding debt on investment, it is not short-term debt, but long-term debt which leads to substantial under-investment due to a debt overhang effect.