Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-25T07:36:41.707Z Has data issue: false hasContentIssue false
  • English
  • Français

Optimal Maturity Structure with Multiple Debt Claims

Published online by Cambridge University Press:  06 April 2009

Joel F. Houston  and
S. Venkataraman
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides an explanation for why firms may choose to simultaneously issue multiple debt claims with varying maturities. The optimal mix of short- and long-term debt allows the firm to precommit to a more efficient liquidation policy. Even in risk-neutral settings, the optimal mix hinges critically on the mean and the variability of the firm's liquidation value. Determining the optimal mix of debt is more complex than just weighing the costs of issuing short- or long-term debt exclusively. The implications of alternate priority structures, informational settings, interest rate uncertainty, and maturity matching strategies are also considered.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 2 , June 1994 , pp. 179 - 197
Copyright
Copyright © School of Business Administration, University of Washington 1994

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barnea, A.; Haugen, R.; and Senbet, L.. Agency Problems and Financial Contracting, Prentice-Hall Foundations of Finance Series. Englewood Cliffs, NJ: Prentice-Hall (1985).Google Scholar
Berkovitch, E., and Greenbaum, S. I.. ‘The Loan Commitment as an Optimal Financing Contract.’ Journal of Financial and Quantitative Analysis, 26 (1991), 83–96.CrossRefGoogle Scholar
Bodie, Z., and Taggart, R.. ‘Future Investment Opportunities and the Value of the Call Provision on Bonds.’ Journal of Finance, 33 (1978), 1187–1200.CrossRefGoogle Scholar
Bolton, P. ‘Renegotiation and the Dynamics of Contract Design.’ European Economic Review. 34 (1990), 303–310.CrossRefGoogle Scholar
Braswell, R.; Sumners, D.; and Reinhart, W.. ‘The Effects of the Tax Act of 1982 on the Appropriate Coupon Strategy for Issuing Corporate Bonds.’ National Tax Journal, 36 (1983), 255–256.CrossRefGoogle Scholar
Bulow, J. I., and Shoven, J. B.. ‘The Bankruptcy Decision.’ Bell Journal of Economics, 9 (1978), 437–156.CrossRefGoogle Scholar
Chang, C. ‘Debt Maturity Structure and Bankruptcy.’ Working Paper, Univ. of Minnesota (1989).Google Scholar
Diamond, D. W. ‘Seniority and Maturity Structure of Bank Loans and Publicly Traded Debt.’ Working Paper, Univ. of Chicago (1990).Google Scholar
Diamond, D. W. ‘Debt Maturity Structure and Liquidity Risk.’ Quarterly Journal of Economics, 106 (1991), 709–737.CrossRefGoogle Scholar
Fama, E., and Miller, M.. The Theory of Finance. New York, NY: Holt, Reinhart & Winston (1972).Google Scholar
Fischer, E.; Heinkel, R.; and Zechner, J.. ‘Dynamic Recapitalization Policies and the Role of Call Premia and Issue Discount.’ Journal of Financial and Quantitative Analysis, 24 (1989), 427–446.CrossRefGoogle Scholar
Flannery, M.J. ‘Asymmetric Information and Risky Debt Maturity Choice.’ Journal of Finance, 41 (1986), 19–38.CrossRefGoogle Scholar
Gale, D., and Hellwig, M.. ‘Incentive Compatible Debt Contract: The One Period Problem.’ Review of Economic Studies, 52 (1985), 674–663.CrossRefGoogle Scholar
Gertner, R., and Scharfstein, D.. ‘A Theory of Workouts and the Effects of Reorganization Law.’ Journal of Finance, 46 (1991), 1189–1222.Google Scholar
Green, R. C. ‘Investment Incentives, Debt, and Warrants.’ Journal of Financial Economics, 13 (1984), 115–136.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. ‘Capital Structure and the Informational Role of Debt.’ Journal of Finance, 45 (1990), 321–350.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. ‘The Design of Bankruptcy Procedures.’ Working Paper, Univ. of Chicago (1993).Google Scholar
Hart, O. ‘Theories of Optimal Capital Structure: A Managerial Perspective.’ In The Deal Decade: What Takeovers and Leveraged Buyouts Mean for Corporate America, Blair, M. ed. Washington, DC: Brookings Institution (1993).Google Scholar
Hart, O., and Moore, J.. ‘Default and Renegotiation: A Dynamic Model of Debt.’ Working Paper, MIT (1989).Google Scholar
Houston, J. F., and Venkataraman, S.. ‘Liquidation under Moral Hazard: The Incentive Effects of Commitments to Lend.’ Working Paper, Univ. of Florida (1993a).Google Scholar
Houston, J. F., and Venkataraman, S.. ‘Information Revelation, Lock-in, and the Role for Bank Loan Commitments.’ Working Paper, Univ. of Florida (1993b).Google Scholar
Jensen, M. ‘Agency Costs of Free Cashflow, Corporate Finance and Takeovers.’ American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M., and Meckling, W.. ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.’ Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Lewis, C. ‘A Multiperiod Theory of Corporate Financial Policy under Taxation.’ Journal of Financial and Quantitative Analysis, 25 (1990), 25–44.CrossRefGoogle Scholar
Myers, S. ‘Determinants of Corporate Borrowing.’ Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Rajan, R. ‘Insiders and Outsiders: The Choice between Informed and Arms-Length Debt.’ Journal of Finance, 47 (1992), 1367–1400.Google Scholar
Shleifer, A., and Vishny, R. W.. ‘Liquidation Values and Debt Capacity: A Market Equilibrium Approach.’ Journal of Finance, 47 (1992), 1343–1366.CrossRefGoogle Scholar
Smith, C. W., and Warner, J. B.. ‘On Financial Contracting: An Analysis of Bond Covenants.’ Journal of Financial Economics, 7 (1979), 117–162.CrossRefGoogle Scholar
Titman, S. ‘The Effect of Capital Structure on a Firm's Liquidation Decision.’ Journal of Financial Economics, 13 (1984), 137–151.CrossRefGoogle Scholar