Cyclical demand and the choice of debt maturity

This study provides a model in which a supplier's use of short- and long-te rm debt depends on the demand for its product. The model predicts that supp liers use short-term debt to match their assets' and liabilities' maturitie s and that their incentive to do so is stronger, the larger the term premiu m. The model also predicts that the use of short-terra debt increases the a mplitudes of the supplier's investment, production, and sales cycles. These changes occur because the use of short-term debt permits suppliers to matc h production and sales more closely to the pattern of demand for the final good.