The maturity rat race

Markus K. Brunnermeier, Martin Oehmke

Research output: Contribution to journalArticle

77 Scopus citations

Abstract

Why do some firms, especially financial institutions, finance themselves so short-term? We show that extreme reliance on short-term financing may be the outcome of a maturity rat race: a borrower may have an incentive to shorten the maturity of an individual creditor's debt contract because this dilutes other creditors. In response, other creditors opt for shorter maturity contracts as well. This dynamic toward short maturities is present whenever interim information is mostly about the probability of default rather than the recovery in default. For borrowers that cannot commit to a maturity structure, equilibrium financing is inefficiently short-term.

Original languageEnglish (US)
Pages (from-to)483-521
Number of pages39
JournalJournal of Finance
Volume68
Issue number2
DOIs
StatePublished - Apr 1 2013

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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