Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads

62 Pages Posted: 8 Sep 2012 Last revised: 10 Mar 2022

See all articles by Hui Chen

Hui Chen

Massachusetts Institute of Technology; National Bureau of Economic Research (NBER)

Yu Xu

University of Delaware

Jun Yang

Bank of Canada

Multiple version iconThere are 2 versions of this paper

Date Written: September 2012

Abstract

We build a dynamic capital structure model to study the link between firms' systematic risk exposures and their time-varying debt maturity choices, as well as its implications for the term structure of credit spreads. Compared to short-term debt, long-term debt helps reduce rollover risks, but its illiquidity raises the costs of financing. With both default risk and liquidity costs changing over the business cycle, our calibrated model implies that debt maturity is pro-cyclical, firms with high systematic risk favor longer debt maturity, and that these firms will have more stable maturity structures over the cycle. Moreover, pro-cyclical maturity variation can significantly amplify the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high beta, high leverage, or a lumpy maturity structure. We provide empirical evidence for the model predictions on both debt maturity and credit spreads.

Suggested Citation

Chen, Hui and Xu, Yu and Yang, Jun, Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads (September 2012). NBER Working Paper No. w18367, Available at SSRN: https://ssrn.com/abstract=2143554

Hui Chen (Contact Author)

Massachusetts Institute of Technology ( email )

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Cambridge, MA 02142
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617-324-3896 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Yu Xu

University of Delaware ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

HOME PAGE: http://https://www.yuxufinance.net/

Jun Yang

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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