Precautionary Maturity Management in Corporate Bond Market
Qiping Xiu, University of Chicago Booth PhD. in Finance, MBA
This paper studies firms' maturity management through early refinancing activities in the corporate bond market. Speculative-grade firms constantly refinance early to extend maturity, Moreover, they take advantage of accommodating credit market conditions to extend maturity on a large scale, leading to a pro-cyclical debt maturity structure. Investment increases following early refinancing and maturity extension. The evidence is consistent with precautionary maturity management, where speculative-grade firms extend maturity to hedge against future refinancing risk, as the longer maturity reduces the possibility of being forced to refinancing during credit market downturns. By contrast, investment-grade firms do not appear to manage their maturity similarly, because they are less exposed to refinancing risk. V/e also do not observe changes in investment following early refinancing for investment-grade firms.