Corporate debt maturity and stock price crash risk

Abstract

We find that firms with a larger proportion of short‐term debt have lower future stock price crash risk, consistent with short‐term debt lenders playing an effective monitoring role in constraining managers’ bad‐news‐hoarding behaviour. The inverse relationship between short‐maturity debt and future crash risk is more pronounced for firms that are harder to monitor due to weaker corporate governance, higher information asymmetry, and greater risk‐taking. These findings suggest that short‐term debt substitutes for other monitoring mechanisms in curbing managerial opportunism and reducing future crash risk. Our study implies that short‐maturity debt not only preserves creditors’ interests, but also protects shareholders’ wealth.

Consumption, asset wealth, equity premium, term spread, and flight to quality

“…Additionally, a higher share of short‐term debt is generally linked with a lower equity premium. This is close in spirit to Dang, Lee, Liu, and Zeng (), who show that firms with a large short‐term debt fraction exhibit lower stock price crash risk. Doukas, Guo, and Zhou () also find that adverse selection equity costs, capital market conditions perceived as favorable, and market timing push firms to issue more debt in hot‐debt market periods compared to cold‐debt market periods.…”

Impact of board gender composition on corporate debt maturity structures

“…Traditionally, debt maturity structure has been viewed as a mechanism of matching investment opportunities (Barclay & Smith, 1995;Myers, 1977), signaling information to the market (Diamond, 1991b;Flannery, 1986;Rajan, 1992), and influencing tax liabilities (Brick & Ravid, 1985). There is also evidence that corporate debt maturity influences choice of leverage and covenants (e.g., Billett et al, 2007) and long-term and short-term stock price performance and risk (Dang, Lee, Liu, & Zeng, 2018;Datta, Iskandar-Datta, & Raman, 2000).…”

Individualistic cultures and crash risk

“…Second, we contribute to a growing body of research that examines the factors linked to stock price crash risk. Existing research shows that earnings management (Hutton et al, ); equity incentives to CEOs (Kim et al, ); complex tax shelters (Kim, Li, & Zhang, ); institutional ownership (An & Zhang, ); the adoption of the international financial reporting system (DeFond et al, ); audit quality (Robin & Hao, ); accounting conservatism (Kim & Zhang, ); overconfident managers (Kim, Wang, & Zhang, ), corporate governance (Andreou, Antoniou, Horton, & Louca, ); corporate debt maturity (Dang, Lee, Liu, & Zeng, ); CEO age (Andreou et al, ); divergence of cash flow and voting rights (Hong, Kim, & Welker, ); employee welfare (Ben‐Nasr & Ghouma, ); and real earnings management (Khurana, Pereira, & Zhang, ) all affect crash risk. Extending this line of the literature, we identify one key dimension of national culture, namely, individualism, that helps fuel crash risk.…”