Investment, Implicit Debt Targets and Debt Maturity

We analyse industrial firms’ financial policies by modelling investment and debt issuances as endogenous variables. In our setup, firms issue costly short-and long-term debt to cover their capital expenditure. This strategy does not assume the existence of explicit debt targets but allows the recovery of implicit debt targets from firms’ investment and financing decisions. The empirical analysis reveals sizeable cross-sectional variation: Implicit debt targets vary with financial conditions, firm size, and investment opportunities. Furthermore, we find that the magnitude of the implicit debt target ratio is sensitive to the investment type.