The Maturity Premium
59 Pages Posted: 13 Nov 2018 Last revised: 21 Apr 2021
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The Maturity Premium
Date Written: April 18, 2021
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.
Keywords: maturity, value premium, debt overhang, cross-section of stock returns, CAPM
JEL Classification: G12, G32, G33
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