Belief disagreement and debt maturity structure

This paper examines how investors’ belief disagreement affects the firm’s debt maturity choice. We find that in the presence of belief disagreement, the firm prefers short-term debt to long-term debt. This is because short-term debt is less risky and can attract more optimistic investors, which rais...

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Bibliographic Details
Published in:Economics letters 2024-10, Vol.243, p.111912, Article 111912
Main Authors: Leng, Dong, Wei, Xu, Zhuo, Yilin
Format: Article
Language:English
Subjects:
Belief disagreement
Debt maturity
Maturity mismatch
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Summary:This paper examines how investors’ belief disagreement affects the firm’s debt maturity choice. We find that in the presence of belief disagreement, the firm prefers short-term debt to long-term debt. This is because short-term debt is less risky and can attract more optimistic investors, which raises the debt price and reduces the cost of debt financing. Our result is stronger when long-term debt is more risky compared to short-term debt and investors’ belief dispersion is higher. •With belief disagreement, the firm prefers short-term debt to long-term debt.•Short-term debt is less risky and can attract more optimistic investors.•The effect is stronger when long-term debt is more risky and belief diversity is higher.•Belief disagreement can worsen the firm’s maturity mismatch problem.
ISSN:0165-1765
DOI:10.1016/j.econlet.2024.111912