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The Maturity Rat Race and Short-Termism

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The global economic financial crisis has rekindled great public interest in one of the oldest questions in finance. That is, what’s the connection between firms’ value and their financial policies? The rationality of debt maturity shortening and managerial short-termism has been at the forefront of the debate. This paper examines the “maturity rat race” proposition in a group of financially distressed firms during the recent crisis in Portugal. We find significant debt maturity shortening before firm default - a finding robust to various empirical specifications. Furthermore, we show that short-term debt overhang leads to managerial myopic behaviors (i.e., short-termism) and the pattern is even more prominent in financially distressed firms. Firms who hold a larger proportion of short-term debt are more prone to invest in short-term assets and engage in earnings management.
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