Corporate Deleveraging : The Impact of Debt Maturity Structure and Callable Debt

Deleveraging, whether via reductions in debt or increases in assets, is costly due to value transfers from shareholders to creditors. It is especially costly in the presence of long-term debt and when the need to deleverage is high. This paper, first, provides empirical evidence consistent with this hypothesis. We, next, show that fixed-price callable debt helps limit value transfers from shareholders to debtholders, hence, mitigating the wealth transfer problem and reducing the deleveraging costs. Consistent the hypothesis that longer-term debt increases deleveraging risk while callability mitigates that risk, firms with long-term (callable) debt tend to exhibit higher (lower) stock return volatility