A Theory of Debt Maturity: The Long and Short of Debt Overhang

Debt maturity influences debt overhang: the reduced incentive for highly-levered borrowers to make real investments because some value accrues to debt.Reducing maturity can increase or decrease overhang even when shorter-term debt's value depends less on firm value.Future overhang is more volatile for shorter-term debt, making future investment incentives volatile and influencing immediate investment incentives.With immediate investment, shorter-term debt typically imposes lower overhang; longer-term debt can impose less if firm value is more volatile in bad times.For future investments, reduced correlation between the value of assets-in-place and profitability of investment increases the overhang of shorter-term debt.