FIN-01-020

Do firms borrow at the lowest-cost maturity? The long-term share in debt issues and predictable variation in bond returns

November 2, 2001

Malcolm Baker, Robin Greenwood and Jeffrey Wurgler

ABSTRACT

We document that firms tend to borrow at the lowest-cost maturity. In aggregate time series data, the share of long-term debt issues in total debt issues is negatively related to subsequent excess bond returns, meaning that firms substitute toward long-term debt when the cost of long-term debt is low relative to the cost of short-term debt. The long-term share is also contemporaneously negatively related to the components of the long-term interest rate that predict higher excess bond returns, including inflation, the real short-term rate, and the term spread. The results suggest that firms use predictable variation in excess bond returns in an effort to reduce the cost of capital.

Malcolm Baker
Institution: Harvard Business School Email: mbaker@hbs.edu

Robin Greenwood
Institution: Harvard University Email: rgreenw@fas.harvard.edu

Jeffrey Wurgler
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0367
Fax: (212) 995-4233
Email: jwurgler@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~jwurgler/

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