Corporate Debt Maturity and Investment Over the Business Cycle

The business cycle dynamics of firms' investment and debt maturity vary across the firm size and age distribution: Young and small firms have strongly pro-cyclical debt maturity and investment, old and large firms a-cyclical debt maturity and weakly pro-cyclical investment. This paper explores the importance of firms' debt maturity choices for their investment dynamics. First, it documents cross-sectional heterogeneity of the cyclicality of firms' debt maturity in the data. Then, it embeds a maturity choice in a model of firm investment and financing. Firms adjust their debt maturity to manage the risk of becoming financially constrained over time. This behavior explains both the life cycle and business cycle dynamics of firms' debt maturity. Due to endogenous debt maturity, a policy aimed at reducing firms' financial constraints leads firms to lengthen their debt maturity and increase leverage instead of reducing it.