We study the endogenous determination of corporate debt maturity in a setting with default risk. We assume that firms … must access the bond market and they issue debt with a flexible structure (coupon, face value, and maturity). Initially … risk. The technology is such that earnings can switch to a higher (but riskier) level. In this second phase firms have …

Expected returns vary when investors face time-varying investment opportunities. In theory, structural long-run risk … models (Bansal and Yaron, 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton, 2000) emphasize sources of risk … that are not observable to the econometrician. We show that the term structure of risk implicit in option prices can reveal …