(Idiosyncratic) Credit-spread Risk and the Dynamics of Liquidity, Lever- age and Maturity of Debt

I study the joint dynamics of leverage, maturity and liquidity choices of a firm. Long-term debt is safer as it limits the firms exposure to roll-over losses driven by credit-spread risk, but short-term debt gives firms more exibility in reducing leverage. As a result, firms have positive cash and debt balances, riskier firms prefer short-term debt, relation between leverage and maturity is positive and maturity structure is imperfectly spread-out. Higher volatility of cash flows makes firms riskier and they opt for shorter-maturity debt, while higher idiosyncratic volatility of credit spreads makes firms chose longer-term borrowing and higher cash balances.