Corporate debt maturity and investment over the business cycle

The business cycle dynamics of firms' debt maturity vary across the firm size distribution. Small and medium-sized firms have a more pro-cyclical debt maturity than large firms. This paper explores the determinants of firms' debt maturity, and the importance of firms' debt maturity for their investment and leverage dynamics. To do so, it embeds a maturity choice in a model of firm investment and financing. Firms shorten debt maturity during times when default risk premiums are high and their internal funds are scarce. This behavior is consistent with both the life cycle and business cycle dynamics of firms' debt maturity. Endogenous debt maturity helps firms to deleverage faster in response to negative shocks.