Debt Maturity Choice and Aggregate Growth

Jacob Sagi Orit Milo - Jul 10, 2023

Working Paper No.   00103-00

We find that a measure of aggregate corporate debt maturity choices strongly predicts real GDP growth. The new measure compares well with other strong GDP predictors from recent literature, is no less robust/stable, and distinct from spread-related variables. We develop a novel theory of firm debt maturity choice explaining these findings: In anticipation of inefficient firm operations during non-contractible negative expected profitability states, long-term lenders charge more interest. When choosing debt maturity, firms balance this against the higher cost of refinancing short-term debt. Maturity choices are more sensitive to profit anticipation whereas default spreads are more sensitive to profit dispersion.

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