Rollover Risk in Commercial Paper Markets and Firms' Debt Maturity Choice

Debt Maturity Structure and Credit Quality

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109014000520 ◽

2014 ◽

Vol 49 (4) ◽

pp. 817-842 ◽

Cited By ~ 49

Author(s):

Radhakrishnan Gopalan ◽

Fenghua Song ◽

Vijay Yerramilli

Keyword(s):

Bond Market ◽

Debt Maturity ◽

Yield Spreads ◽

Credit Quality ◽

Debt Maturity Structure ◽

Rollover Risk ◽

Maturity Structure

AbstractWe examine whether a firm’s debt maturity structure affects its credit quality. Consistent with theory, we find that firms with greater exposure to rollover risk (measured by the amount of long-term debt payable within a year relative to assets) have lower credit quality; long-term bonds issued by those firms trade at higher yield spreads, indicating that bond market investors are cognizant of rollover risk arising from a firm’s debt maturity structure. These effects are stronger among firms with a speculative-grade rating and declining profitability, and during recessions.

Download Full-text

Debt Market Liquidity and Corporate Default Prediction

Quarterly Journal of Finance ◽

10.1142/s2010139215500032 ◽

2014 ◽

Vol 04 (04) ◽

pp. 1550003

Author(s):

Deming Wu ◽

Suning Zhang

Keyword(s):

Market Liquidity ◽

Subprime Crisis ◽

Short Term ◽

Time Dynamic ◽

Corporate Default ◽

Rollover Risk ◽

Default Prediction ◽

Commercial Paper ◽

Debt Market ◽

Nonfinancial Firms

Recent research on the subprime crisis and rollover risk suggests that debt market liquidity is a major factor affecting the risk of default. This implies that firms that rely heavily on short-term debt, such as commercial paper (CP), are at greater risk of default. Debt market illiquidity could reduce the value of the firm and thus impact the firm's leverage, which is a major factor in predicting default. We estimate the effect of debt market conditions on the probability of default with a discrete-time dynamic hazard model that takes into account measurement error in firm leverage. Our results indicate that rollover risk is a significant factor in causing default, but the risk was higher for nonfinancial firms around 2000–2001 and considerably less entering the subprime crisis.

Download Full-text