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Rollover Risk and Credit Risk

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  • ZHIGUO HE
  • WEI XIONG

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.

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File URL: http://hdl.handle.net/10.1111/j.1540-6261.2012.01721.x
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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 67 (2012)
Issue (Month): 2 (04)
Pages: 391-430

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Handle: RePEc:bla:jfinan:v:67:y:2012:i:2:p:391-430

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Citations

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Cited by:
  1. Robert J. Shiller, 2014. "Speculative Asset Prices," American Economic Review, American Economic Association, vol. 104(6), pages 1486-1517, June.
  2. Arnold, Marc & Wagner, Alexander F. & Westermann, Ramona, 2013. "Growth options, macroeconomic conditions, and the cross section of credit risk," Journal of Financial Economics, Elsevier, vol. 107(2), pages 350-385.
  3. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers 13-05, University of Cologne, Centre for Financial Research (CFR).
  4. Gechun Liang & Eva L\"utkebohmert & Wei Wei, 2012. "Funding Liquidity, Debt Tenor Structure, and Creditor's Belief: An Exogenous Dynamic Debt Run Model," Papers 1209.3513, arXiv.org, revised Sep 2013.
  5. Zhiguo He & Wei Xiong, 2010. "Financing Speculative Booms," Levine's Working Paper Archive 661465000000000327, David K. Levine.
  6. Douglas W. Diamond & Zhiguo He, 2014. "A Theory of Debt Maturity: The Long and Short of Debt Overhang," Journal of Finance, American Finance Association, vol. 69(2), pages 719-762, 04.
  7. Max Bruche & Anatoli Segura, 2013. "Debt Maturity And The Liquidity Of Secondary Debt Markets," Working Papers wp2013_1303, CEMFI.
  8. Leo de Haan & Jan Willem van den End, 2012. "Bank liquidity, the maturity ladder, and regulation," DNB Working Papers 346, Netherlands Central Bank, Research Department.
  9. Imbierowicz, Björn & Rauch, Christian, 2014. "The relationship between liquidity risk and credit risk in banks," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 242-256.
  10. Kempf, Alexander & Korn, Olaf & Uhrig-Homburg, Marliese, 2012. "The term structure of illiquidity premia," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1381-1391.
  11. Christian Gouriéroux & Jean-Cyprien Heam, 2013. "Funding Liquidity Risk from A Regulatory Perspective," Working Papers 2013-20, Centre de Recherche en Economie et Statistique.
  12. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, vol. 109(2), pages 535-548.
  13. Patricio Valenzuela, 2013. "Rollover risk and corporate bond spreads," Documentos de Trabajo 300, Centro de Economía Aplicada, Universidad de Chile.
  14. Choi, Jaewon & Hackbarth, Dirk & Zechner, Josef, 2013. "Granularity of corporate debt," CFS Working Paper Series 2013/26, Center for Financial Studies (CFS).
  15. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers 13-05 [rev.], University of Cologne, Centre for Financial Research (CFR).
  16. Garcia-Appendini, Emilia, . "The Real Costs of Industry Contagion," Working Papers on Finance 1410, University of St. Gallen, School of Finance.
  17. Peter Christoffersen & Du Du & Redouane Elkamhi, 2013. "Rare Disasters and Credit Market Puzzles," CREATES Research Papers 2013-45, School of Economics and Management, University of Aarhus.
  18. Zhiguo He & Wei Xiong, 2012. "Debt Financing in Asset Markets," NBER Working Papers 17935, National Bureau of Economic Research, Inc.
  19. Kalimipalli, Madhu & Nayak, Subhankar & Perez, M. Fabricio, 2013. "Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2969-2990.
  20. Schuster, Philipp & Uhrig-Homburg, Marliese, 2012. "The term structure of bond market liquidity conditional on the economic environment: An analysis of government guaranteed bonds," Working Paper Series in Economics 45, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.

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