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Do firms borrow at the lowest-cost maturity? The long-term share in debt issues and predictable variation in bond returns

Authors: Baker, Malcolm
Greenwood, Robin
Wurgler, Jeffrey
Issue Date: 2-Nov-2001
Series/Report no.: FIN-01-020
Abstract: We document that firms tend to borrow at the lowest-cost maturity. In aggregate time series data, the share of long-term debt issues in total debt issues is negatively related to subsequent excess bond returns, meaning that firms substitute toward long-term debt when the cost of long-term debt is low relative to the cost of short-term debt. The longterm share is also contemporaneously negatively related to the components of the longterm interest rate that predict higher excess bond returns, including inflation, the real short-term rate, and the term spread. The results suggest that firms use predictable variation in excess bond returns in an effort to reduce the cost of capital.
Appears in Collections:Finance Working Papers

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