"The Maturity Rat Race"
Journal of Finance,
Volume: 68 | Issue: 2 | Pages: 483-521
Publication type: Journal article
Why do some firms, especially financial institutions, finance themselves so short-term? We develop an equilibrium model of maturity structure and show that extreme reliance on short-term financing may be the outcome of a maturity rat race: an individual creditor can have an incentive to shorten the maturity of his loan, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other creditors to shorten their maturity as well. This dynamic toward short maturities is present whenever interim information is mostly about the probability of default rather than the recovery in default. For borrowers that cannot commit to a maturity structure, most importantly financial institutions, financing is inefficiently short-term.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.