EVOLUTION OF DEBT MATURITY DURING THE 2008 FINANCIAL CRISIS

Abstract

The paper aims to verify and extend Willsey & Siregar (2012)’s analysis regarding the effects of the 2008 Financial Crisis on debt maturity. Different from the authors’ finding that debt maturity increases during the crisis, we do not find any significant change in debt maturity, both before and after controlling for corporate specific characteristics and market-wide condition. One possible explanation identified in this paper is that the impact on debt maturity due to demand-side forces (i.e. firm’s preference for longer-term debt) might have been offset by the impact resulted from the supply-side force of corporate debt capital (i.e. creditor’s desire towards shorter-term loans). For demand-side forces, our evidences show that firms use more long-term debt to reduce liquidity risk while less short-term debt is needed to deal with underinvestment problem. On the contrary, banks appear to favour short-term loans, leading to shorter debt maturity for unrated firms. This result suggests while firms might prefer long-term debt during the financial crisis, pressures from supply side factors hinder them from achieving their desired debt maturity level.