The Maturity Drivers Of Corporate Capital Structure Of Private/Unlisted Companies

Abstract

This paper investigates whether debt quality matters and the role of debt maturity choice. At the corporate level, the mismatch between debt maturity and other performance drivers results in widespread unexpected risks. Shortening maturity incentivizes more liquid investments, usually those that are less productive. At the same time, the shorter the maturity of debt the higher the probability of corporate default, given a fixed duration of the assets. At the financial level, longer maturity tends to increase the cost of debt, but has no clear impact on the probability of default. Corporate structure, namely dimension and private status, may exert a strong impact on such a trade-off. This paper presents an empirical analysis of a sample of Italian unlisted companies, examining the entire set of detailed financial reports for the five year period 2005–2009. Two subsets are identified, having separated out the companies which disappeared in the source database in 2011. Comparing the results from the two subsets contributes to better insulation of endogenous bankruptcy phenomena as proposed by Leland and Toft (1996). We find: (i) proof of L&T approach but that the creditors (rather than the shareholders) seem to be the generators of the endogenous default; (ii) evidence of impacts from debt maturity on business performance, particularly as a value driver of growing options; (iii) significant relations between debt maturity and company size; (iv) a specific contribution of debt maturity to the value of the tax shield