**Money and Finance in Global Markets**

192 Business Dynamics in the 21st Century

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*vol. 93, nº 6,* 1130-1151.

**10** 

*USA* 

Ewa J. Kleczyk

**The Determinants of** 

*Custom Analytics, ImpactRx, Inc. Horsham, Pa.* 

**Corporate Debt Maturity Structure** 

According to Stiglitz (1974) and Modigliani and Miller (1958), in efficient and integrated markets, the financial management policy cannot decrease the costs of capital due to the interrelation between the different types of capital costs. Consequently, there is no gain from substituting debt for equity. However, evidence has been found against this claim, demonstrating that equity financing is related to the predictability of stock returns. For example, firms issue equity when the equity premium is low in order to time an inefficient market and reduce the cost of capital borrowing and/or to optimize capital structure together with expected returns (Baker et al., 2003). On the other hand, there is substantially less literature on debt financing. For example, according to Bosworth (1971), debt maturity is related to market conditions, such as the interest and inflation rates. Furthermore, Barclay and Smith (1995) find firms with higher information asymmetries to issue short-term debt. They determine a positive relationship between debt-maturity and dividend yield as well as a negative relationship between the maturity of debt and the term-spread (Barclay & Smith, 1995). Although the above papers provide support for the association between debt and returns, none offers information on the cost of capital borrowing at different times of debt

The relationship between debt maturity and cost of capital borrowing is examined by Baker et al. (2003). In their paper, they analyze the variation in the maturity of debt due to debt market conditions (inflation and interest rates) as well as the excess bond returns. Excess bond returns are an index of investment-grade corporate bonds over commercial papers (Baker et al., 2003). In their article, the authors utilize aggregate annual time-series data and find a close relation between debt maturity and predictable variation in the excess bond returns. According to their findings, firms issue long-term debt when bond returns are low and short-term debt when returns are high. They explain the above evidence as managers timing an inefficient capital market using public information to guide their debt maturity decisions. They are, however, unable to conclude whether firms actually reduce the overall cost of capital borrowing from timing the market as a result of difficulties in interpreting the

This paper extends the empirical analysis performed by Baker et al. (2003) to the pooled time- and cross-sectional data in order to examine the relationship between the excess bond returns and the corporate debt maturity structure. In addition, the analysis extends previous

**1. Introduction** 

maturity due to lack of analysis of returns data.

predictions of the regression results (Baker et al., 2003).
