Abstract
We show that firms with longer debt maturities earn risk premia not explained by unconditional factors. Embedding dynamic capital structure choices in an asset-pricing framework where the market price of risk evolves with the business cycle, we find that firms with long-term debt exhibit more countercyclical leverage. The induced covariance between betas and the market price of risk generates a maturity premium similar in size to our empirical estimate of 0.21% per month. We also provide direct evidence for the model mechanism and confirm that the maturity premium is consistent with observed leverage dynamics of long- and short-maturity firms.
Original language | English |
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Pages (from-to) | 670-694 |
Journal | Journal of Financial Economics |
Volume | 144 |
Issue number | 2 |
DOIs | |
Publication status | Published - May 2022 |