Do Firms Diversify Bonds Maturity to Manage Funding Liquidity Risk?
Corporate funding illiquidity is a key concern for firms and avoiding debt maturing together is one important way to manage funding liquidity risk. Using comprehensive data on bond issuance, we identify firms that maintain diversified bonds maturity structure overtime and examine the impact on firms’ funding liquidity. We document that larger firm with a higher leverage ratio, lower profitability, more growth opportunities, and are not dependent on banks for financing have the most diversified maturity structure of bonds outstanding. We show that firms with a diversified bonds maturity structure consistently maintain the structure through frequently issuing new bonds with diversified maturity. Evidence on firms’ funding liquidity risks shows highlight the positive impact of bonds maturity diversification on reducing firm’s funding liquidity risks, as firms with diversified bonds maturity have easier access to financing source with lower costs. We further show that the positive impact is most pronounced when firms face more liquidity risks as the average maturity of their bonds outstanding is shorter. Our study provides new insights into debt diversification as an effective way to manage corporate funding liquidity risk.
The ERIM PhD Lunch Seminars are dedicated to enhance the methodological dialogue between PhDs and are organised by the ERIM PhD Council.