Topic: Debt Overhang and Liquidity Risk

Speaker: Michal Szkup, Assistant Professor of Economics, Department of Economics, University of British Columbia

Date: May 11^th (Wed.)

Time: 1:30pm-2:30pm

Location: Building 4, Room 101

Language: English

Abstract:

This paper analyzes how liquidity risk driven by strategic uncertainty affects borrower’s optimal choice of maturity structure and his investment incentives. I find that strategic uncertainty increases liquidity risk discouraging the borrower from issuing short-term debt. Moreover, I show that an unexpected raise in the strategic uncertainty can explain a simultaneous increase in the number of defaults on existing debt and higher costs of issuing new debt typically observed in recessions. I also find that in the presence of liquidity risk and strategic uncertainty short-term debt leads to a more severe under-investment problem compared to long-term debt. Nevertheless, as profitability of future investments increases, a borrower tends to rely more on debt of shorter maturity. This is because, higher expected profits decrease strategic uncertainty and liquidity risk decreasing negative effects of short-term debt.

About the speaker:

Michal Szkup is an assistant professor of economics at Department of Economics, University of British Columbia. His current research interests are information economics, international macroeconomics and financial economics. Dr. Szkup earned a Ph.D. in Economics from New York University in 2014 and a B.A. from London School of Economics in 2007. He has paper published in Journal of Economic Theory and International Economic Review (forthcoming).