Review of Quantitative Finance and Accounting, 19: 351–377, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Determinants of Debt Maturity at Issuance:
A System-Based Model
FoxSchool of Business and Management, Temple University, Philadelphia, PA 19122 Tel.: 215-204-5881
Department of Finance, Sawyer School of Management, Suffolk University, Boston, MA 02108
State Street Associates, Cambridge, MA 02138
Abstract. We examine the determinants of corporate debt maturity while taking into account the interdependent
relation between maturity and leverage. We do this by estimating a simultaneous-equations model on debt maturity
and leverage for a sample of bond-issuing ﬁrms. To compare with previous studies, we also estimate a single-
equation model on debt maturity using OLS. We deﬁne debt maturity as either the maturity of bonds at issuance
(incremental approach), or the percentage of a ﬁrm’s total debt that matures in more than three years (balance-
sheet approach). Corroborating the ﬁndings of many previous studies, our single-equation OLS results support
the underinvestment hypothesis purporting that ﬁrms with greater growth opportunities have shorter-term debt.
However, under the simultaneous-equations model, the negative relation between a ﬁrm’s debt maturity and its
growth opportunities ceases to hold. Instead, it is the leverage decision that is inﬂuenced by growth opportunities.
This suggests that existing models may overestimate the effect of growth opportunities on debt maturity.
Keywords: debt maturity, debt issuance, leverage, system-based models
JEL Classiﬁcation: G32
A ﬁrm’s choice of debt maturity is an integral part of its capital structure decision. Re-
searchers have put forward several hypotheses identifying factors that determine corporate
debt maturity. These factors include underinvestment due to agency problems, maturity
matching between assets and liabilities, information asymmetry, liquidation risk, taxes and
Empirical models of debt-maturity behavior follow two approaches in measurement of
maturity: the balance-sheet approach and the incremental approach. The balance-sheet
approach deﬁnes debt maturity as either the percentage of a ﬁrm’s total debt outstanding
that has a short or long remaining time to maturity (e.g., Barclay and Smith, 1995), or the
weighted-average maturity of a ﬁrm’s liability items (e.g., Kim, Mauer and Stohs, 1995;
Stohs and Mauer, 1996).
The incremental approach, as in Mitchell (1991, 1993) and Guedes
and Opler (1996), deﬁnes debt maturity as the maturity of the debt instruments at issuance.