Debt Management： How to Reduce Debt throughFinancial Methods.docVIP

Debt Management： How to Reduce Debt throughFinancial Methods 【ABSTRACT】Companies always incur debts to gain financial support. But debt can always cause trouble， such as overhang or even bankruptcy. Some analysts say that short-term debts can relief the problem. I think that consolidation of the debts is a better solution. But managers should better weigh the financial method before making the decision. 【Key words】Debt management Short-term debt Debt Consolidation SUMMARY Incurring debt happens regularly during management practices. However， debt can be difficult to be handled by financial managers. And sometimes it can be risky because it can turn to be heavy burdens for companies when they won’t be able to meet their obligations and they are at financial risk of bankruptcy. Consolidation of the debts payments is an efficient way to cut down expenses and even to preserve the credit of the company. The most typically method of the consolidation among various options is to make all the short-term debts combined into a larger loan. CONCEPT Debt can be risky sometimes. More debt means more likely to cause debt overhang and even bankruptcy. Short-term debt can be regarded as a possible solution to alleviate the problem of debt overhang （Myers， 1977）. In other words， we can say that if all loans mature before the opportunity of the investment， then without debt in place the firm can make investment decisions as if an all-equity firm. Following this logic， debt which will mature soon should have reduced overhang problem. Although these loans mature after relevant investment decisions， they are indeed opposite to before （Diamond and He， 2014）. However， there are several disadvantages existing in short-term debt. For companies who meet their debt repayments without access to outside funds， short-term debt is able to result in early firm liquidation and closure （Diamond， 1991; Gertner and Scharfstein， 1991）. Sometimes conditional on ex post financial distress， short-term de