Maturity Rationing and Collective Short-Termism
Coauthor(s): Konstantin Milbradt.
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Financing terms and investment decisions are jointly determined. This interdependence, which links firms' asset and liability sides, can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investments are long-term may adopt second-best projects of shorter maturities. This worsens financing terms for firms with shorter maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.
Source: Journal of Financial Economics
Milbradt, Konstantin, and Martin Oehmke. "Maturity Rationing and Collective Short-Termism." Journal of Financial Economics (forthcoming).