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The Maturity Rat Race

Authors

  • MARKUS K. BRUNNERMEIER,

  • MARTIN OEHMKE

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    • Brunnermeier is at Princeton University, NBER, and CEPR. Oehmke is at Columbia University. For helpful comments, we are grateful to an anonymous referee, an Associate Editor, Viral Acharya, Ana Babus, Patrick Bolton, Philip Bond, Catherine Casamatta, Peter DeMarzo, Doug Diamond, Thomas Eisenbach, Itay Goldstein, Cam Harvey (the Editor), Lars-Alexander Kuehn, Konstantin Milbradt, David Skeie, Vish Viswanathan, Tanju Yorulmazer, Kathy Yuan, and seminar participants at Columbia University, the Federal Reserve Bank of New York, the Oxford-MAN Liquidity Conference, the NBER Summer Institute, the 2009 ESSFM in Gerzensee, the Fifth Cambridge-Princeton Conference, the Third Paul Woolley Conference at LSE, the 2010 WFA meetings, the Minneapolis Fed, Princeton University, the 2010 SITE conference at Stanford, the NYU/New York Fed Financial Intermediation Conference, the University of Florida, and the 4th Bank of Portugal Conference on Financial Intermediation. We thank Ying Jiang for excellent research assistance. We gratefully acknowledge financial support from the BNP Paribas research centre at HEC.


ABSTRACT

Why do some firms, especially financial institutions, finance themselves so short-term? We show that extreme reliance on short-term financing may be the outcome of a maturity rat race: a borrower may have an incentive to shorten the maturity of an individual creditor's debt contract because this dilutes other creditors. In response, other creditors opt for shorter maturity contracts as well. This dynamic toward short maturities is present whenever interim information is mostly about the probability of default rather than the recovery in default. For borrowers that cannot commit to a maturity structure, equilibrium financing is inefficiently short-term.

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