Granularity of Corporate Debt: Theory and Tests
Authors: Jaewon Choi, Dirk Hackbarth and Josef Zechner
We study to what extent firms spread out their bonds’ maturity dates across time, which we call “granularity” of corporate debt. In our model, a firm’s access to the bond market may be hindered temporarily, either because the capital market freezes or because the firm becomes exposed to large risks. Therefore, it can be advantageous to diversify the debt rollover across maturity dates. Using a large sample of corporate bond issuers during the 1991–2009 period, we find evidence that supports our model’s predictions in cross-sectional and time-series tests. In the cross-section, corporate debt is more granular for larger and more mature firms, for firms with better investment opportunities, with more tangible assets, with higher leverage ratios, with lower values of assets in place, and with lower levels of current cash flows. We find that during the recent financial crisis especially firms with valuable investment opportunities implemented more granular debt structures. In the time-series, we also document that firms manage granularity in that newly issued corporate bond maturities complement pre-existing bond maturity profiles.
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Read more about Dirk Hackbarth
Julie de Molade
Department of Finance, CBS