Debt Overhang and Maturity Structure

Abstract

This study examines the effect of the maturity structure of debt on corporate investment utilizing industry deregulation and alternatively high natural gas price as the exogenous shock to investment opportunities. When the shock occurs, the relation between shorter debt maturity and investment becomes more positive, and exclusively so in firms more likely to be susceptible to investment distortions caused by debt overhang. This study finds no evidence that shorter debt maturity exacerbates debt overhang. The evidence is consistent with Myers (1977) that shorter debt maturity alleviates investment distortions caused by debt overhang.