Debt maturity and the choice between bank loans and public bonds

We explore the relation between the maturity of new debt issues and firms’ choice between bank loans and public bonds. We use borrowing firms’ asset maturity and effective tax rates to instrument for the debt maturity, and bank competition and bank liquidity in the borrowers’ state to instrument for the debt choice. The analysis provides evidence of causality in both directions. Consistent with theories based on information asymmetry and agency costs, we find that firms which seek to increase the borrowing term by one standard deviation are 30% less likely to choose bank loans, while firms which prefer bank loans have 70 months shorter maturity on average. Our results remain significant, albeit with smaller economic magnitudes, when we use different samples, include firm fixed effects, or use heteroskedasticity based instruments as in Lewbel (J Bus Econ Stat 30(1):67–80, 2012).