A significant component of finance literature is concerned with the choice of capital structure. Most of this literature, though, has ignored the associated problem of debt maturity structure. Research that has modeled the choice of debt maturity can be divided into two streams. The first contains papers that relate anticipated interest rate changes and the term structure of interest rates to debt maturity decisions. For example, Morris (1976) explains the maturity structure decision in terms of the correlation between future interest rates and firm net operating income, and Brick and Ravid (1985) rely on tax considerations to argue that the optimal debt maturity is a function of the term structure of interest rates.
Papers in the second stream rely on agency theoretic arguments and asymmetric information to explain debt maturity decisions. For example, Barnea, Haugen, and Senbet (1980) argue that short-term debt acts as a bonding device, resolving the conflict of interest between stockholders and bondholders that arise due to information asymmetry and moral hazard. On the other hand, Flannery (1986) and Diamond (1990), use a signaling framework to explain the debt maturity decision. They focus on the debt maturity decision when firms' cash flows are independently distributed over time.