Debt Maturity and the Dynamics of Leverage

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