Does short-maturity debt discipline managers? Evidence from cash-rich firms' acquisition decisions

We study the disciplinary role of short-maturity debt in cash-rich firms. We report evidence that such debt mitigates cash-rich firms' overinvestment in acquisitions. The disciplinary role is mostly concentrated among cash-rich firms that are weakly governed and have limited access to the public debt market and is also more pronounced for cash-rich firms that operate in less competitive industries. Furthermore, for cash-rich acquirers, high levels of short-maturity debt are associated with higher acquisition announcement returns and better post-acquisition operating performance. Overall, our results highlight the effective role of short-maturity debt in reducing agency cost.