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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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15653.

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Date of creation: Jan 2010
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Publication status: 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.
Handle: RePEc:nbr:nberwo:15653

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Citations

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Cited by:
  1. Douglas W. Diamond & Zhiguo He, 2012. "A Theory of Debt Maturity: The Long and Short of Debt Overhang," NBER Working Papers 18160, National Bureau of Economic Research, Inc.
  2. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers, University of Cologne, Centre for Financial Research (CFR) 13-05, University of Cologne, Centre for Financial Research (CFR).
  3. Imbierowicz, Björn & Rauch, Christian, 2014. "The relationship between liquidity risk and credit risk in banks," Journal of Banking & Finance, Elsevier, Elsevier, vol. 40(C), pages 242-256.
  4. Choi, Jaewon & Hackbarth, Dirk & Zechner, Josef, 2013. "Granularity of corporate debt," CFS Working Paper Series, Center for Financial Studies (CFS) 2013/26, Center for Financial Studies (CFS).
  5. Kalimipalli, Madhu & Nayak, Subhankar & Perez, M. Fabricio, 2013. "Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(8), pages 2969-2990.
  6. Kempf, Alexander & Korn, Olaf & Uhrig-Homburg, Marliese, 2012. "The term structure of illiquidity premia," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(5), pages 1381-1391.
  7. Zhiguo He & Wei Xiong, 2012. "Debt Financing in Asset Markets," American Economic Review, American Economic Association, American Economic Association, vol. 102(3), pages 88-94, May.
  8. Max Bruche & Anatoli Segura, 2013. "Debt maturity and the liquidity of secondary debt markets," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 55404, London School of Economics and Political Science, LSE Library.
  9. Christian Gouriéroux & Jean-Cyprien Heam, 2013. "Funding Liquidity Risk from A Regulatory Perspective," Working Papers, Centre de Recherche en Economie et Statistique 2013-20, Centre de Recherche en Economie et Statistique.
  10. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(2), pages 535-548.
  11. Zhiguo He & Wei Xiong, 2010. "Financing Speculative Booms," Levine's Working Paper Archive 661465000000000327, David K. Levine.
  12. de Haan, Leo & van den End, Jan Willem, 2013. "Bank liquidity, the maturity ladder, and regulation," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(10), pages 3930-3950.
  13. Robert J. Shiller, 2014. "Speculative Asset Prices," American Economic Review, American Economic Association, American Economic Association, vol. 104(6), pages 1486-1517, June.
  14. Arnold, Marc & Wagner, Alexander F. & Westermann, Ramona, 2013. "Growth options, macroeconomic conditions, and the cross section of credit risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(2), pages 350-385.
  15. 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, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering 45, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  16. 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.
  17. Patricio Valenzuela, 2013. "Rollover risk and corporate bond spreads," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 300, Centro de Economía Aplicada, Universidad de Chile.
  18. 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.
  19. Garcia-Appendini, Emilia, . "The Real Costs of Industry Contagion," Working Papers on Finance, University of St. Gallen, School of Finance 1410, University of St. Gallen, School of Finance.
  20. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers, University of Cologne, Centre for Financial Research (CFR) 13-05 [rev.], University of Cologne, Centre for Financial Research (CFR).

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