Debt maturity and the cost of bank loans

Chih Wei Wang, Wan Chien Chiu, Tao Hsien Dolly King

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

Abstract

This study explores the extent to which a firm's debt maturity structure affects the cost of bank loans. By examining the U.S. syndicated loans from 1990 and 2014, we find that debt maturity structure is a major determinant of loan spreads, after accounting for firm- and loan-specific variables and firm and year fixed effects. A one standard deviation increase in the ratio of short-term debt to total assets is associated with an increase of 11.44 basis points in loan spread, representing an additional $0.644 million in interest expenses. The results support the rollover risk hypothesis, which predicts that short-term debts intensify the shareholder and bondholder conflicts and lead to greater credit risk. In addition, high-growth firms experience significantly smaller increases in their loan spreads than low-growth firms when the short-term debt ratio increases. This finding is consistent with the asset substitution theory that short-term debt mitigates the managerial/shareholders’ risk-taking incentives, leading to a decrease in firm risk. Our results remain strong when we use alternative short-term debt proxies, address endogeneity concerns, and perform various robustness tests.

Original languageEnglish
Article number105235
JournalJournal of Banking and Finance
Volume112
DOIs
StatePublished - Mar 2020

Keywords

  • Asset substitution
  • Bank loan
  • Debt maturity
  • Rollover risk
  • Short-term debt

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