Asset Life, Leverage, and Debt Maturity Matching
80 Pages Posted: 9 Feb 2022 Last revised: 12 Feb 2024
Date Written: October 5, 2023
Abstract
Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.
Keywords: capital age, asset life, maturity matching, debt cycles, maturity cycles
JEL Classification: E32, G31, G32
Suggested Citation: Suggested Citation