Essays in Corporate Finance

In this thesis I study how firms choose their optimal debt maturity. The recent financial crisis illustrated why debt maturity is an important determinant of firms’ capital structure and it also renewed economists’ interest in this topic, see for example Brunnermeier and Oehmke (2013), He and Milbradt (2016), Ju and Ou-Yang (2006), Crouzet (2016), and Huang et al. (2017). This thesis exists of two chapters. In the first chapter, titled “Information Dynamics and Debt Maturity”, I develop a dynamic model of financing decisions and optimal debt maturity choice in which creditors face adverse selection and learn about the firm’s quality from news. In equilibrium, shareholders may choose to postpone debt issuance to reduce adverse selection and improve the pricing of newly issued debt. Over time, the benefits of learning decrease and zero-leverage firms eventually decide to issue debt. Because shorter maturity debt is less sensitive to information, younger firms issue shorter maturity debt to alleviate adverse selection while mature firms issue longer maturity debt, leading to a life-cycle theory of debt maturity. In the second chapter, titled “Debt Maturity and Lumpy Debt”, I develop a dynamic capital structure model in which shareholders determine a firm’s leverage ratio, debt maturity, and default strategy. In my model, the firm’s debt matures all at once. Therefore, after repaying the principal shareholders own all the firm’s cash flows and can pick a new capital structure. The possibility to alter the capital structure at maturity gives shareholders the incentive to issue finite maturity debt and allows me to study firms’ joint choice of leverage and debt maturity. I also extend my model by allowing for time-varying capital supply to study time-variation in firms’ joint choice of leverage and debt maturity.

Hugonnier, Julien
Morellec, Erwan
Lausanne, EPFL

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 Record created 2018-06-14, last modified 2019-12-05

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