Maturity Rationing and Collective Short-Termism

Maturity Rationing and Collective Short-Termism

Financing terms and investment decisions are jointly determined. This interdependence links firms’ asset and liability sides and can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is relatively expensive and potentially rationed. In response, firms whose first-best investment opportunities are long-term may change their investments towards second-best projects of shorter maturities. This worsens financing terms for firms with shorter maturity projects, inducing them to change their investments as well. In equilibrium, investment is inefficiently short-term. Equilibrium asset-side adjustments by firms can amplify shocks and, while privately optimal, can be socially undesirable.

Konstantin Milbradt, and Martin Oehmke

Journal of Financial Economics

December 2015

I didn't find this helpful.This was helpful. Please let us know if you found this article helpful.
By |2018-01-01T00:00:00-08:00January 1st, 2018|Financial Regulation, Reference, Systemic Risk/Financial Crises|