Like households, firms that borrow money to finance operations must make decisions about the optimal maturity of their debt. Should a firm take a short-term loan now and refinance later? Or is the firm better off locking in a long-term interest rate now? In this article, Mitchell Berlin discusses recent theories of how firms choose their debt maturity. Some of these theories are very useful for explaining how chief financial officers (CFOs) choose the maturity of their firms’ debt. However, CFOs seem to believe that they can predict future interest rates and time their borrowings accordingly, and this behavior fundamentally conflicts with most economic theories.
This article appeared in the First Quarter 2006 edition of Business Review.View the Full Article