Debt maturity structure and firm investment

This close attention shows that the maturity make of a firm's debt has a significant impact upon its investment decisions. We exhibit after controlling for the consequence of the overall level of leverage, that a higher percentage of long-term debit in total debt significantly brings investment for firms with high increase opportunities. In contrast, the correlation between liability maturity and investment is not significant for firms with depressed growth opportunities. The results are stalwart at the firm level and at the business portion level. These results hold plane after controlling for the endogeneity vexed question inherent in the relationship between total leverage, the maturity composition of leverage, and investment.

**********

in what manner a firm's level of debit and the maturity structure of the obligation affect its investment decisions are fundamental issues in corporate finance. In a Miller-Modigliani world with perfect markets, a firm's financial policy--including the maturity of its debt--has no bearing upon its investment decisions. In a world with incomplete markets, however, agency puzzles inherent in interactions between shareholders, debtholder and management, and associated with the horizontal of leverage and its maturity composition, give rise to underinvestment or overinvestment incentives. A firm's financial policy may have a significant event on its investment. Several empirical studies have investigated the relationship between firm leverage and investment. For example, Lang, Ofek and Stulz (1996) and Aivazian, Ge and Qiu (2005) directly trial the effect of leverage upon firm investment and find that leverage is significantly negatively related to investment. However, no empirical inquiry has explored the effect of the maturity conformation of corporate debt on corporate investment. Whether and to what expanse debt maturity influences firm investment remains an unresolv empirical issue.

In this article, we directly trial for the relationship between due maturity and firm investment. We find that longer due maturity is associated with les investment for firms with high development opportunities. In contrast, debt maturity is not significantly related to investment for firms with depressed growth opportunities. These results support the prediction of Myers (1977) that obligation maturing after the expiration of the expansion option causes underinvestment problems. High-growth opportunity firms are more likely to face an underinvestment puzzle compared with low-growth opportunity firms and, thus, the negative result of longer debt maturity upon investment should be stronger for high-growth opportunity firms.

Note, however, that leverage and its maturity conformation are not exogenous to investment. The negative linkage between investment and long-term liability may be due to the firm's adjustment of its horizontal of debt, and the maturity mode of building of the debt, in view of anticipated futurity investment opportunities. Indeed, if futurity investment opportunities are anticipated and leverage adjustment require to be paid [i]or[/i] undergones are low, managers can bring leverage and shorten debt maturity to mitigate the underinvestment problem; thus, it may be that due maturity structure has no significant impact upon investment once this endogeneity bias is taken into account. We engross two alternative approaches to correct for the endogeneity bias.

single approach follows that of Lang et al. (1996) who distinguish between the impact of leverage upon growth in a firm's core business and that in its non-core business. They argue that a firm determines its leverage according to extension opportunities in its core business portion and that its capital configuration is weakly exogenous to investment in its non-core business portion If capital structure has no impact upon investment, one should not take note of a strong relationship between leverage and investment in the firm's non-core part The other approach uses the instrumental variable mode to address the endogeneity puzzle Here, the maturity of the firm's assets and the tangibility of the assets are used as instrumental variables for debit maturity and leverage, respectively. Overall, our flows indicate that the negative event of longer debt maturity upon investment remains strong for non-core business sections and these results are robust using the instrumental variable approach. Thus, our proceeds hold even after correcting the endogeneity bias, and support the hypothesis that due maturity structure has a significant impact upon firm investment.

The repose of the article proceeds as tread in the steps ofs Section I reviews the theoretical underpinnings of the linkage between liability maturity and investment. Section II at hands the baseline results on the relationship between liability maturity and investment and addresses the endogeneity issue. Section III closes the article.

I. The due Maturity-Investment Relationship

That debit maturity could affect corporate investment was pointed without in a seminal paper by the agency of Myers (1977), who analyzed possible externalities generated by the agency of debt on shareholders' (and management's) optimal investment strategy. If obligation matures after the expiration of the firm's investment option, it restores the incentives of the shareholder-management coalition in ascendency of the firm to invest in positive net-present-value investment throws since the benefits accrue, at least partially, to the bondholder rather than accruing largely to the shareholders. Hence, compared to firms with shorter liability maturities, firms with long-term obligation are less likely to exploit valuable increase opportunities.