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Effect of short-term debt on default risk: Evidence from Pacific Basin countries

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  • Wang, Chih-Wei
  • Chiu, Wan-Chien

Abstract

This study examines the extent to which a firm’s short-term debt affects its default probability in five Pacific Basin countries (Australia, South Korea, Malaysia, Singapore, and Taiwan) during 2002–2015. We alleviate concerns about the endogeneity of short-term debt by using long-term debt obligations that matured in the next year. One standard deviation in this measure leads to a significant increase in the default probability within one year by 10%–34%, depending on country. The effect of the rollover risk increasing default probability is stronger in a crisis, for firms experiencing declines in profitability, and under poor credit conditions. Reserving liquidity (i.e., more cash holdings or less financial constraints) acts as a buffer against the rollover risk effect. Overall, our findings support the view that firms that face more difficulty with debt turnover have a higher likelihood of default.

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  • Wang, Chih-Wei & Chiu, Wan-Chien, 2019. "Effect of short-term debt on default risk: Evidence from Pacific Basin countries," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x18300209
    DOI: 10.1016/j.pacfin.2018.05.008
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    More about this item

    Keywords

    Short-term debt; Default risk; Rollover risk; Asset substitution;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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