Too much of a good thing? A theory of short-term debt as a sorting device

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• 作者：Philipp Johann K&ouml ; nig ; ^{pkoenig@diw.de" class="auth_mail" title="E-mail the corresponding author} ; David Pothier
• 关键词：Debt maturity ; Asymmetric information ; Liquidity risk
• 刊名：Journal of Financial Intermediation
• 出版年：2016
• 出版时间：April 2016
• 年：2016
• 卷：26
• 期：Complete
• 页码：100-114
• 全文大小：509 K

文摘

This paper shows that the liquidity risk associated with short-term debt financing can be used to sort insolvent firms out of financial markets when their solvency risk is private information. Notwithstanding this sorting role of short-term debt, unregulated financial firms tend to choose an inefficiently short debt maturity structure. This inefficiency arises for two reasons. First, by issuing more short-term debt, low-risk firms reduce their expected funding costs. This leads to a misalignment of private and social incentives as firms fail to fully internalize the social costs of becoming illiquid. Second, while the sorting role of short-term debt is reflected in a decline of long-term interest rates when more short-term debt is issued, creditors’ inability to observe firms’ solvency risk leads to an excessive reduction of long-term interest rates. This further distorts firms’ funding choice towards short-term debt.