Firms’ financing and debt maturity choices: An empirical analysis from the perspective of asset value dynamics

Abstract

We examine empirically the relationship between the dynamics of firm value and their financing and debt maturity choices. Theoretical studies show that the actual drift of firm value is a key determinant of firms’ leverage and debt maturity by incorporating the conflicts between undiversified insiders (managers) and well-diversified outside investors. We empirically analyze firms’ incremental leverage and debt maturity choice important determinants of firms’ leverage and debt maturity, we find that the drift, or the expected return of total assets, does affect the firms’ choices of incremental leverage and debt maturity, as predicted by theoretical studies. Our results provide the evidence that the divergence of interests between undiversified managers and well-diversified shareholders has significant impact on firms’ financing policies that are generally controlled by managers, and the resulting leverage and maturity choices may deviate from maximizing shareholders’ value.