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Trade-Off Model of Debt Maturity Structure

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  • Jun, Sang-Gyung
  • Jen, Frank C

Abstract

In this paper, we suggest the trade-off model to explain the choice of debt maturity. This model is based on balancing between risk and reward of using shorter-term loans. Shorter-term loans have cost advantage over, but incur higher refinancing and interest rate risk than longer-term loans. Using the Compustat data, we show that the principal components of financial attributes are financial flexibility and financial strength. Therefore, only firms with greater financial flexibility and financial strength can use proportionately more short-term loans. We also document that financially strong firms take advantage of lower interest rates of short-term debt. They use proportionately more short-term loans when the term premium is high. The results of our study also provide evidence supporting the agency cost hypothesis, which is strongly supported by current literature. Copyright 2003 by Kluwer Academic Publishers

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  • Jun, Sang-Gyung & Jen, Frank C, 2003. "Trade-Off Model of Debt Maturity Structure," Review of Quantitative Finance and Accounting, Springer, vol. 20(1), pages 5-34, January.
    • Handle: RePEc:kap:rqfnac:v:20:y:2003:i:1:p:5-34
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    Cited by:

    1. Orman, Cüneyt & Köksal, Bülent, 2017. "Debt maturity across firm types: Evidence from a major developing economy," Emerging Markets Review, Elsevier, vol. 30(C), pages 169-199.
    2. Manak C. Gupta, 2016. "An Integrated Model for the Cost-Minimizing Funding of Corporate Activities over Time," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 1-18, November.
    3. Carmelo Intrisano & Anna Paola Micheli & Anna Maria Calce, 2021. "Financial Structure: A Comparative Study between European Listed and Unlisted Companies," International Journal of Business and Management, Canadian Center of Science and Education, vol. 15(11), pages 111-111, July.
    4. Juan Pedro Sánchez Ballesta & M. Fuensanta Cutillas Gomariz, 2012. "Financial reporting quality, debt maturity and investment efficiency," Working Papers. Serie EC 2012-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    5. Cuneyt Orman & Bulent Koksal, 2015. "Structure of Debt Maturity across Firm Types," Working Papers 1521, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    6. McGuinness, Paul B., 2021. "Board member age, stock seasoning and the evolution of capital structure in Chinese firms," International Business Review, Elsevier, vol. 30(3).
    7. Faisal Mahmood & Dongping Han & Nazakat Ali & Riaqa Mubeen & Umeair Shahzad, 2019. "Moderating Effects of Firm Size and Leverage on the Working Capital Finance–Profitability Relationship: Evidence from China," Sustainability, MDPI, vol. 11(7), pages 1-14, April.
    8. Cutillas Gomariz, Mª Fuensanta & Sánchez Ballesta, Juan Pedro, 2014. "Financial reporting quality, debt maturity and investment efficiency," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 494-506.
    9. Ginesti, Gianluca & Ossorio, Mario & Dawson, Alexandra, 2023. "Family businesses and debt maturity structure: Focusing on family involvement in governance to explain heterogeneity," Journal of Family Business Strategy, Elsevier, vol. 14(2).
    10. Suzan Hol & Nico van der Wijst, 2006. "The financing structure of non-listed firms," Discussion Papers 468, Statistics Norway, Research Department.
    11. Díaz-Díaz, Nieves Lidia & García-Teruel, Pedro J. & Martínez-Solano, Pedro, 2016. "Debt maturity structure in private firms: Does the family control matter?," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 393-411.
    12. Ivan E. Brick & Rose C. Liao, 2017. "The joint determinants of cash holdings and debt maturity: the case for financial constraints," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 597-641, April.
    13. F. Javier Sánchez Vidal & Juan Francisco Martín Ugedo, 2008. "Edad y tamaño empresarial y ciclo de vida financiero," Working Papers. Serie EC 2008-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    14. López-Gracia, José & Mestre-Barberá, Reyes, 2011. "Tax effect on Spanish SME optimum debt maturity structure," Journal of Business Research, Elsevier, vol. 64(6), pages 649-655, June.
    15. Casino-Martínez, Alejandro & López-Gracia, José & Mestre-Barberá, Reyes & Peiró-Giménez, Amado, 2019. "An agency approach to debt maturity of unlisted and listed firms in the European setting," European Management Journal, Elsevier, vol. 37(3), pages 339-352.
    16. Chim M. Lau & Ulrike Schaede, 2020. "Of substitutes and complements: trade credit versus bank loans in Japan, 1980–2012," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 305-326, July.
    17. Yomna Abdulla & Viet Anh Dang & Arif Khurshed, 2016. "Debt maturity and initial public offerings," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1129-1165, November.
    18. Orman, Cüneyt & Bülent, Köksal, 2015. "Structure of Debt Maturity across the Firm Type Spectrum," MPRA Paper 64860, University Library of Munich, Germany.
    19. Attaullah Shah & Zahoor Khan, 2016. "Importance of Judicial Efficiency in Capital Structure Decisions of Small Firms: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(4), pages 361-394.
    20. Nufazil Altaf, 2024. "Working Capital Financing, Firm Performance and Financial Flexibility: Evidence from Indian Hospitality Firms," Global Business Review, International Management Institute, vol. 25(2_suppl), pages 199-210, April.
    21. Qazi Awais Amin & Tom Williamson, 2021. "Firms cash management, adjustment cost and its impact on firms’ speed of adjustment: a cross country analysis," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 53-89, January.
    22. Paul B. McGuinness, 2019. "The Role of Governance and Bank Funding in the Determination of Cornerstone Allocations in Chinese Equity Offers," JRFM, MDPI, vol. 12(3), pages 1-20, July.
    23. G. Oka Warmana & I. Ketut Rahyuda & Ida Bagus Anom Purbawangsa & Ni Luh Gede Sri Artini, 2020. "Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(3), pages 215-231, September.
    24. Pedro J. García‐Teruel & Pedro Martínez‐Solano & Juan P. Sánchez‐Ballesta, 2010. "Accruals Quality and Debt Maturity Structure," Abacus, Accounting Foundation, University of Sydney, vol. 46(2), pages 188-210, June.
    25. Onur Kemal Tosun & Lemma W. Senbet, 2020. "Does internal board monitoring affect debt maturity?," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 205-245, January.

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