Choice of Maturity and Financial Intermediation

Firms face the problem of choosing a debt maturity structure when financing an investment project. In addition, they have to decide which financing source to take. The aim of this article is firstly to give an explanation for the differing maturity choices by firms. As is shown below, the maturity choice depends mainly on the probability or realization of the cash-flow after each period. This means that firms prefer financing congruent to the realizations of the cash-flow. Secondly, this article explains the advantage of using a financial intermediary. It is shown that the financing source depends on the maturity choice. If a firm finances short-term it prefers bank loans whereas public debt is chosen by firms financing long-term.