Template-Type: ReDIF-Paper 1.0
Title: Debt Maturity and Innovation
Author-Name: Yuliyan Mitkov
Author-Email: ymitkov@uni-bonn.de


Classification-JEL: G24, G32, G33, O31
Keywords: Debt maturity, Innovation, Risk-taking, Renegotiation, Agency costs

Abstract: The financing of innovative firms must balance two goals. On one hand, since innovation is inherently risky, the firm must receive adequate protection after failure to motivate innovative activity. At the same time, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. In this paper, I propose a theory of debt maturity as an incentive device to motivate innovation. I show how the firm’s optimal debt maturity is shaped by the possibility of debt renegotiations, the tangibility of its assets and the riskiness of its innovative project. The model predicts that innovative firms would lengthen their debt maturity when expecting to extract more concessions from their financiers once the project has started.

Note: 
Length: 41
Creation-Date: 2020-07
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp191
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2020_191