Debt Maturity Structure and Liquidity Shocks

Abstract

We analyze the role of a firm's debt maturity structure when refinancing its debt after a liquidity shock that reduces the firm's cash flow. Staggered debt diminishes the share of outstanding debt that a firm has to refinance at any given time, which should be most beneficial for highly levered firms. However, we show that for highly levered firms, a firm's ability to roll over its maturing debt hinges on its ability to prefinance its outstanding debt expiring in future periods. Prefinancing involves holding sufficient cash to repay the outstanding debt when it expires and eliminates the potential benefits of staggered debt. If agency problems prevent a firm from holding sufficient cash to implement this strategy, then staggered debt can reduce a firm's ability to withstand a negative cash flow shock.