Literature Review on Maturity Matching Theory

Stohs and Maurer (1996) or Morris (1976) argue that a firm can face risk of not having sufficient cash in case the maturity of the debt had shorter than the maturity of the assets or even vice versa in case the maturity of the debt was greater than asset maturity (the cash flow from assets necessary for the debt repayment terminates). Following these arguments, the maturity matching principle belongs to the determinants of the corporate debt maturity structure.

A frequent recommendation in the literature discussed that a firm should go with the maturity structure of its assets to that of its debt. Maturity matching can concentrate these threats and thus a structure of corporate hedging that decreases projected expenses of financial suffering. In a related element, Myers (1977) explained that maturity matching could control agency conflicts  between equity holders  and  debt holders  by ensuring  that  debt  repayments had planned  to match up  with  the decrease in the worth of assets in place. At the closing stages of an asset's life, the firm encountered a reinvestment judgment. Concerning to debt that matures at that time assists to restore the suitable investment benefits as soon as new investments were needed. Though, this analysis specifies that the maturity of a firm’s assets did not the only determinant of its debt maturity. Its growth options play a vital role as well. Chang (1989) revealed that maturity matching could reduce organization expenses of debt financing. 

 

Emery (2001) argues that firms avoid the term premium by matching the maturity of their liabilities and assets.  Hart  and Moore  (1994) confirm matching  principle  by  showing  that  slower  asset  depreciation means  longer  debt maturity.  Therefore,  we  expect  a  positive  relationship  between  debt  maturity  and  asset maturity. Capeskin (1999) differentiates two strategies of maturity matching namely the accounting and financing approach. The accounting approach considers the assets as current and fixed ones and calls for the financing of the current assets by short-term liabilities and of the fixed assets by long-term liabilities and equity. The financing approach considers the assets as permanent and temporary. In these terms the fixed assets are definitely permanent ones and some stable part of the fluctuating current assets was also taken as permanent. This approach then suggests financing the permanent assets by long-term funds (long-term liabilities and equity) and temporary assets by short-term liabilities. Consequently, the financing approach generally employs ceteris paribus more long-term liabilities than the accounting approach does. 

Mark, Hoven and Mauer (1996) come across with well-built support for the regular textbook recommendations that firms should compare the maturity period of their liabilities to that of their assets. Their results were indicating asset maturity a key aspect in discussing instability in debt maturity structure. Shah and khan (2005) find unambiguous support for maturity matching hypothesis. Their findings reveal that the fixed assets vary directly with debt maturity structure.

The financing approach compared with accounting approach decision making had a classical risk return trade-off relationship. In praxis, the corporate commonly favor the accounting approach before the finance approach, the same holds for our consideration of maturity matching for the empirical evidence of the debt maturity structure. Based on these Maturity matching arguments, we will consider the impact of balance sheet liquidity immunization on the corporate debt maturity structure.

Guedes and Opler (1996) Interestingly, the mean of their estimation of asset maturity does not appear to be vary much between firms, those issue debt (term of one to nine years) and  firms that  issue  debt up to twenty nine years term. But firms that issue debt for greater than thirty years term had assets with significantly long lives. Assumptions expect that firms will compare the maturity of assets and liabilities show that partially correct.