A Note on Liquidity Risk Management

Abstract

When a firm is unable to rollover its debt, it may have to seek more expensive sources of financing or even liquidate its assets. This paper provides a normative analysis of minimizing such rollover risk, through the optimal dynamic choice of the maturity structure of debt. The objective of a firm with long-term assets is to maximize the effective maturity of its liabilities across several refinancing cycles, rather than to maximize the maturity of the current bonds outstanding. An advantage of short- term financing is that a firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value. (JEL G32, G33)