Short-term Debt and Corporate Governance

According to existing theories, short-term creditors promote corporate governance by responding quickly to new information. I show that this very feature of short-term debt can also hurt corporate governance, as it can undermine information revelation in financial markets. In particular, excessive short-term debt creates a feedback loop that reduces large shareholders' exit and voice incentives, thus diminishing share price informativeness and managerial incentives. On the bright side, moderate levels of short-term debt improve governance by large shareholders via exit and voice. I derive the optimal debt maturity structure and new empirical predictions.