Corporate Debt Maturity and Risk-Taking
Corporate debt theory shows that debt maturity structure directly influences borrower investment risk, where short-term debt can mitigate agency conflicts (such as asset substitution) but also cause severe underinvestment in illiquid, high-return growth projects.
Picture this
If a bank lends money for one week at a time, a shopkeeper cannot buy a large delivery truck that takes months to pay off. Shorter-term debt acts like a tight leash that forces the shopkeeper to stick to safe, immediate deals, while longer-term debt gives the freedom to pursue bigger, higher-paying long-term projects.
What the evidence says
Rigid short-term debt repayment schedules in microfinance act like corporate short-term debt constraints, preventing poor micro-entrepreneurs from making illiquid, high-return investments due to liquidity-driven underinvestment incentives.
- Who
- Theoretical capital structure literature synthesis applied to experimental microcredit data from 845 female entrepreneurs in Kolkata, India.
- How
- Theoretical comparative analysis contrasting Myers (1977) debt overhang and underinvestment models with Jensen & Meckling (1976) asset substitution theory.
What to do
Apply corporate capital structure models of debt maturity to microfinance contract engineering to balance agency costs against underinvestment risks.
From the source
"In contrast, the idea that the structure of debt contracts influences entrepreneurial risk-taking and investment exists in many corporate finance models."
101_290 microfinance and entrepreneurship AER2013.pdf