Can Managers Successfully Time the Maturity Structure of Their Debt Issues?

Authors

  • ALEXANDER W. BUTLER,

  • GUSTAVO GRULLON,

  • JAMES P. WESTON

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    • Butler is from the University of Texas at Dallas. Grullon and Weston are from Rice University. We appreciate helpful discussions with Jeremy Stein. Thanks also to Espen Eckbo, Wayne Ferson, Rob Hansen, Scott Hein, Ravi Jagannathan, Robert McDonald, Chris Pantzalis, Paul Schultz, Mark Seasholes, Robert Stambaugh (the editor), Wanda Wallace, Ivo Welch, Jeff Wurgler, Luigi Zingales, two anonymous referees, an anonymous associate editor, and seminar participants at Rice University, Northwestern University, Cornell University, Boston College, Texas Christian University, Tulane University, Baylor University, Southern Methodist University, University of Texas at Austin, University of Texas at Dallas, the Batten Conference at William and Mary, and the Corporate Finance Program Meeting at NBER. Any remaining errors belong solely to the authors.

ABSTRACT

This paper provides a rational explanation for the apparent ability of managers to successfully time the maturity of their debt issues. We show that a structural break in excess bond returns during the early 1980s generates a spurious correlation between the fraction of long-term debt in total debt issues and future excess bond returns. Contrary to Baker, Taliaferro, and Wurgler (2006), we show that the presence of structural breaks can lead to nonsense regressions, whether or not there is any small sample bias. Tests using firm-level data further confirm that managers are unable to time the debt market successfully.

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