Asset life, leverage, and debt maturity matching
Thomas Geelen, Jakub Hajda, Erwan Morellec, Adam Winegar
Journal of Financial Economics · 2024 · Volume 154
DOI: 10.1016/j.jfineco.2024.103796
Abstract
Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.
Keywords
Debt cycles, Maturity matching, Asset life, Capital age, Maturity cycles
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