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Risk aversion and debt maturity structure

Author

Listed:
  • Jorge Fernández Ruiz

    (El Colegio de México)

  • Blanca Cecilia García Medina

    (El Colegio de México)

Abstract

We study the relationship of risk aversion and debt maturity structure. In a model in which adverse selection in financial markets creates a role for the use of short-term debt, we allow the possibility of borrowers being risk-averse. This creates a trade-off between reduced expected financing costs and higher risk and allows for the study of the effect of risk aversion on optimal maturity structure. We prove that, as risk aversion increases, so does the percentage of debt that is long-term.

Suggested Citation

  • Jorge Fernández Ruiz & Blanca Cecilia García Medina, 2003. "Risk aversion and debt maturity structure," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(2), pages 275-291, July-Dece.
    • Handle: RePEc:emc:ecomex:v:12:y:2003:i:2:p:275-291
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    References listed on IDEAS

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    1. Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1996. "The Mexican peso crisis: Sudden death or death foretold?," Journal of International Economics, Elsevier, vol. 41(3-4), pages 265-283, November.
    2. Flannery, Mark J, 1986. "Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
    3. Jorge Fernández Ruiz, 2002. "Optimal financial contracting and debt maturity structure under adverse selection," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 17(1), pages 37-65.
    4. Douglas W. Diamond, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 709-737.
    5. Mayer,Colin & Vives,Xavier (ed.), 1993. "Capital Markets and Financial Intermediation," Cambridge Books, Cambridge University Press, number 9780521443975, January.
    6. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
    Full references (including those not matched with items on IDEAS)

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