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The Effects of Short-Term Liabilities on Profitability: The Case of Germany

Discussion Papers 635, 17 S.

Christopher F. Baum, Dorothea Schäfer, Oleksandr Talavera

2006. Nov.

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Using data from Germany this paper examines the direct effect of non-financial firms' use of short-term versus long-term liabilities. We develop a structural model of a firm's value maximization problem that predicts that profitability of the firm will change if firms alter their use of short-term versus long-term liabilities. We find that firms that rely more heavily on short-term liabilities are likely to be more profitable.

Dorothea Schäfer

Research Director Financial Markets in the Macroeconomics Department

JEL-Classification: G32;G30
Keywords: profitability, short-term liabilities, maturity structure, capital structure
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