Capital Age and Debt Maturity: Evidence from U.S. Public Firms on Asset Life and Financing Cycles

Abstract

This paper examines how firms' capital age and asset life influence their financing decisions, specifically focusing on debt maturity and leverage cycles. Using a comprehensive dataset of U.S. public firms from 1995 to 2023, we document that capital age is negatively related to both leverage and debt maturity, while asset life is positively associated with debt maturity and the length of debt cycles. We develop a dynamic model in which firms issue debt to finance investment and subsequently deleverage as capital ages to create financial slack for future replacement investments. Our model predicts that firms issue debt with a maturity that matches the useful life of their assets and with a repayment schedule that reflects the need to free up debt capacity as capital ages. These dynamics generate financing cycles where leverage and debt maturity decrease as capital ages. Cross-sectional tests reveal that the length of debt cycles and average debt maturity increase with asset life. Our findings help reconcile conflicting evidence on the maturity matching principle and demonstrate that both capital age and asset life are critical determinants of corporate financing choices.