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Rollover Traps

Author

Listed:
  • Marco Della Seta

    (University of Lausanne - School of Economics and Business Administration (HEC-Lausanne))

  • Erwan Morellec

    (Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute)

  • Francesca Zucchi

    (Federal Reserve Board)

Abstract

We model the effects of debt maturity and cash holdings on default risk. When firms have short-term debt outstanding, negative operating shocks lead to a drop in liquid reserves and may cause firms to suffer losses when rolling over their debt, due to weaker fundamentals. This amplification mechanism gets more pronounced as debt maturity decreases, increases default risk, and can give rise to a rollover trap, a scenario in which firms burn their cash flows and cash reserves due to severe rollover losses. High exposure to rollover risk can also make claimholders risk-loving and lead distressed firms to implement gambling strategies.

Suggested Citation

  • Marco Della Seta & Erwan Morellec & Francesca Zucchi, 2016. "Rollover Traps," Swiss Finance Institute Research Paper Series 16-19, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1619
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    File URL: http://ssrn.com/abstract=2742124
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    More about this item

    Keywords

    Short-term debt financing; rollover risk; financial amplification;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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