Claudia Custodio, Miguel A. Ferreira, and Luis Laureano
Why are U.S. firms using more short-term debt?
Journal of Financial Economics | Volume 108, Issue 1 (Apr 2013), 182–212

In this paper, we study the debt maturity in US industrial firms from 1976 to 2008. We find a sharp decrease in debt maturity, with the median percentage of debt maturing in more than 3 years decreasing from 64% in 1976 to 49% in 2008. We take different approaches to investigate this trend: first we look at firm characteristics to check whether the main debt maturity theories can explain it; second we investigate whether the decrease in debt maturity is the result of demand-side factors or the result of changes that are not related to firm characteristics (supply-side effects); and finally we show the importance of new listings in explaining the trend.

Our data are taken from the Compustat Industrial Annual database. We exclude financial firms and utilities. The final sample has 12,938 unique firms with a total number of 97,215 observations. Our proxy for debt maturity is the percentage of debt maturing in more than 3 years (Barclay-Smith, JF 1995).

Debt maturities declined for decades

We identify a strong decrease in debt maturity over the sample period, in particular until the year 2000 when a reversal takes place. The decline is stronger for longer maturities. Leverage ratios remain stable over the same period, which suggests that the shift towards shorter maturities is not related to structural changes in the usage of leverage. The downward trend in debt maturity is statistically and economically significant: the median of the proportion of debt maturing in more than 3 years decreases 0.61% per year. We examine the time trend in debt maturity across firms of different sizes: small, medium-size and large firms. We find that debt maturity is significantly shorter for small firms, but also, that the decrease in debt maturity is much stronger in this group of firms. The number of firms and its evolution in the sample period is also much different between the small firms group and the other two (see Figures 1 and 2).

1: Number of firms
figcfl1

 

2: Percent of long-term debt maturing in 3 years or more
figcfl1

 

It's not agency, information, signaling, or liquidity

We then test whether debt maturity theories can explain the time trend. We find no evidence that agency costs of debt (resulting from conflict of interest between shareholders and debt holders), nor managerial agency costs (resulting from conflict of interest between shareholders and managers), explain the decline in debt maturity over time. Firms with lower agency costs of debt experience significant decreases in debt maturity. When we categorize firms by proxies of managerial agency costs—governance index (Gompers-Ishii-Metrick (QJE 2003)) and managerial ownership—we do not see different patterns across groups of firms.

We then investigate the role of information asymmetry between the firm and shareholders (or different access to information). We use balance sheet proxies of information asymmetry (level of research and development and tangibility of assets), dynamic proxies (bond rating, institutional ownership, analyst coverage, dispersion of analyst forecasts, asset volatility) and a market microstructure measure of adverse selection (illiquidity measure of Amihud (JFM 2002)). We find evidence that firms with more information asymmetry use more short-term debt, which is consistent with the information asymmetry theory. More important to our analysis, we observe that firms with higher information asymmetry exhibit a decline in debt maturity.

The signaling (when firms try to signal the market their private information with the type of actions taken) and liquidity risk (the risk a firm with debt faces of not being able to refinance debt) theories do not offer any support in explaining the decrease in debt maturity. Contrary to the signaling theory, we find that firms with better projects have higher debt maturity than firms with worse quality projects (proxied by abnormal earnings or credit quality). We also find no distinct pattern in the evolution of the debt maturity between the two groups of firms.

It's younger firms

The decrease in debt maturity seems to be related to the disappearing dividends phenomena (Fama-French (JFE 2001)). Non-dividend payers use more short-term debt and decrease their debt maturity over time, as opposed to the dividend payers group of firms. Less profitable firms and firms holding more cash (Bates-Kahle-Stulz (JF 2009)) are also related to the negative trend in debt maturity.

We investigate whether the decrease in debt maturity is a result of demand-side factors, or a result of changes that are not related to firm characteristics using multivariate regression tests. We find that changes in firm characteristics explain part of the trend in debt maturity but they cannot fully explain it. Unobservable differences between firms and changes in the impact of firm characteristics on debt maturity also have limited power in explaining the evolution of debt maturity. Thus, firms are using more short-term debt, irrespective of their characteristics. Indeed, the expected debt maturity, generated by a regression model estimated using the earlier part of the sample period, systematically overestimates the actual maturity and consequently fails to fully capture the decrease in maturity.

We next show the importance of the firm listing cohort to explain the debt maturity trend. We categorize firms into four cohorts using the firm's listing year. Figure 3 shows the yearly evolution of the median debt maturity by listing groups.

3: Median debt maturity by listing group
figcfl3

 

From Figure 3 it is clear that firms in the most recent listing groups use more short-term debt. We can also observe no negative time trend within each group. We conclude that the change in the sample composition of firms is a key factor to explain the decline in debt maturity. We perform additional tests to support this major finding: first we investigate if our findings are directly related to firm age, and conclude that the decline in debt maturity is not fully explained by firm age; next we test whether there is individual time trend for each firm with at least 5 and 10 yearly observations. The results show that the large majority of firms have an insignificant time trend, and that less than 20% have a negative and significant trend. Finally, we use a balanced panel (a panel where in all the years of the sample the firms are the same, thus excludes new listings) and we do not find a trend in the median debt maturity.

To further investigate the importance of the new listing in explaining the decrease in debt maturity, we run several panel regressions. When modeling debt maturity against a time trend and controlling for the listing decade (we use 4 dummy variables regarding firms listed in each of the 4 decades covered in our sample) we find that the trend coefficient (the average change on the debt maturity level from moving one year forward) is positive and statistically significant (from zero), which suggests that the average debt maturity increases through time. We also observe that, on average, firms listed on more recent decades have shorter debt maturity levels, with the exception of the last decade. When we add to our model firm characteristics, the time trend coefficient loses its explaining power. Controlling for the firm age and the founding age (following Jovanovic-Rousseau (AER 2001) and Loughran-Ritter (FM 2004)) keeps our main conclusions intact: there is no significant trend in debt maturity when accounting for the firm's listing year; young firms listed in the 1980s and 1990s use on average more short-term debt than a comparable firm listed in the 1970s. In summary, the new listing effect in necessary and sufficient to explain the negative trend in debt maturity.

We also look into industry composition and the evolution of debt maturity by industry. From a total of 49 industries (following Fama-French (JFE 1997) classification) we find 31 with a negative time trend, of which 23 are statistically significant (e.g., medical equipment and computer software). On the other hand, we find only one industry (petroleum and natural gas) with a positive and significant time trend. Industry composition also seems to play a role in explaining the decrease in debt maturity, because industries with stronger decreases in debt maturity also have stronger increases in market capitalization.

Using data from Worldscope for 23 developed countries for the 1990–2008 period, we check whether the decrease in debt maturity is exclusive to the US. Overall we find no evidence of a decrease in debt maturity outside of the US. When analyzing the data individually for four other major countries (UK, Germany, France and Japan) we only find a decrease in debt maturity in Japan. The Japanese trend can mostly be related to the existence of low levels of short-term interest rates during the sample period.

The supply of credit also mattered

Finally, we look at supply-side effects that might explain the trend in debt maturity. We begin by studying the maturity of new bond issues and syndicated loans. The sample of bond issues contains 12,821 issues for 1,986 industrial firms over the 1976–2008 period. We find a negative and strongly significant trend in the average and median maturity of new bond issues. The median maturity falls from 25 years in 1976 to 7.5 years in 2008. This trend is common to all size groups (including large firms), which differs from the results using balance sheet data. Using regression analysis, we find a negative and significant trend in the maturity of bond issues of all size groups, and also that this trend is not fully explained by the listing year. When examining the sample composition of bond issuers by size, we find that small firms have increased their importance in the public debt markets, which helps to explain the decrease in debt maturity.

To study the private debt market, we use a sample of 113,094 syndicated loans from 5,114 firms for the period 1987–2008. We find no evidence of a time trend. We also do not find a significant increase in the relative importance of small firms during the 1990s, as we do for bond markets. When we study the volume of private debt compared to public debt, we find an increase in the share of public debt. Together with the decrease in public debt maturity, this supports the idea that the decrease in debt maturity has taken place mainly in public debt markets.

To further investigate how the supply of credit affects debt maturity, we use an exogenous contraction in the supply of speculative-grade credit after 1989 resulting from regulatory changes derived from the collapse of Drexel Burnham Lambert. Speculative-grade firms significantly reduced their use of long-term debt relative to investment-grade firms. We also find that unrated firms decreased debt maturity after 2007 (i.e., at the time of a large contraction in the supply of bank loans) significantly more than rated firms. Thus, we conclude that debt maturity is affected by supply-side factors.

Conclusion

Overall, we find a secular decrease in the debt maturity, concentrated among small firms and firms with high information asymmetries. New firms listed in the 1980s and 1990s are responsible for the negative trend, because they use much more short-term debt than older firms. This trend is inexistent when we consider the firms listing vintage. However, we find that demand-side factors cannot fully explain the decrease in debt maturity. Supply-side factors are also relevant. The decrease in debt maturity occurred mainly in the public debt markets and has increased the exposure of firms to credit and liquidity shocks. This may have as well exacerbated the effects of the 2007–2008 financial crisis on the real economy.


16-botticelli
Botticelli (1445–1510): La Primavera. Italy, early Renaissance, 1484.. Unless you are an avid scholar of Greco-Roman mythology and the political interpretations of figures in this painting, you will overlook the point of this painting. It is supposed to depict a message from the Humanistic philosophy thriving in the 15th century Florence, which professed the human triumph of freedom over tyranny. Fortunately, it is nevertheless easy to appreciate the famous master-painter Botticelli's work in creating this beautiful garden of Venus. Alas, poor Botticelli died in obscurity, having been overshadowed by younger masters, such as Leonardo de Vinci, Raphael, and Michelangelo. It was only in the late 19th century that Botticelli was reinterpreted to have been among the earliest and finest old masters of his time.