Debt Maturity and the Liquidity of Secondary Debt Markets
Bruche, M. & Segura, A. (2017). Debt Maturity and the Liquidity of Secondary Debt Markets. Journal of Financial Economics, 124(3), pp. 599-613. doi: 10.1016/j.jfineco.2017.04.002
Abstract
We model the debt maturity choice of firms in the presence of fixed issuance costs in the primary market and search frictions in the secondary market for debt. In the secondary market, short maturities improve the bargaining position of sellers, which reduces the required issuance yield. Long maturities reduce reissuance costs. The optimally chosen maturity trades off both considerations. Equilibrium exhibits inefficiently short maturity choices: An individual firm does not internalize that a longer maturity increases expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms.
| Publication Type: | Article |
|---|---|
| Publisher Keywords: | Debt maturity, Search, Liquidity |
| Subjects: | H Social Sciences > HG Finance |
| Departments: | Bayes Business School > Finance |
Available under License Creative Commons Attribution Non-commercial No Derivatives.
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