"Maturity Rationing and Collective Short-Termism"
October
2012
Publication type: Working paper
Research Archive Topic: Business Economics and Public Policy, Corporate Finance
Abstract
Financing terms and investment decisions are jointly determined. This interdependence links firms? asset and liability sides and can lead to short-termism in investment. In our model, asymmetric information frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and, potentially, rationed. In response, firms whose first-best investment opportunities are long-term may distort their investment towards second-best projects of shorter maturities. This worsens financing terms for firms with shorter maturity projects, inducing them to distort their investment as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.
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