Debt Maturity and Investor Heterogeneity

Matthew Darst and Ehraz Refayet

♦ This paper studies how investor heterogeneity impacts equilibrium debt maturity. The optimal issuance strategy combines both long- and short-term debt. Long-term debt contains default risk, but hedges against intermediate downturns. Short-term debt provides repayment commitment but must be rolled and becomes risky during downturns. Issuing multiple debt maturities spreads the cost of these risky claims to investors most willing to hold risk at different points in time. Our model implies that debt ownership concentration can impact firm value and investment decisions.

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