Rollover Risk and Credit Risk

No 15653, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper models a firm's rollover risk generated by conflict of interest between debt and equity holders. When the firm faces losses in rolling over its maturing debt, its equity holders are willing to absorb the losses only if the option value of keeping the firm alive justifies the cost of paying off the maturing debt. Our model shows that both deteriorating market liquidity and shorter debt maturity can exacerbate this externality and cause costly firm bankruptcy at higher fundamental thresholds. Our model provides implications on liquidity-spillover effects, the flight-to-quality phenomenon, and optimal debt maturity structures.

JEL-codes: G01 G33 (search for similar items in EconPapers)
Date: 2010-01
Note: AP CF ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Zhiguo He & Wei Xiong, 2012. "Rollover Risk and Credit Risk," Journal of Finance, American Finance Association, vol. 67(2), pages 391-430, 04.

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Journal Article: Rollover Risk and Credit Risk (2012)
Working Paper: Rollover Risk and Credit Risk (2010)
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