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Debt Maturity, Default, and Investment under Rollover Risk and Solvency Concern

Author

Listed:
  • Hiroshi Osano

    (Institute of Economic Research, Kyoto University)

  • Keiichi Hori

    (School of Economics,kwansei Gakuin University)

Abstract

We consider the effects of the endogenous interaction between rollover risk and solvency concern-generated by not only debt rollover but also by an assessment regarding the firm's solvency risk via a learning process over time-on the decisions of the firm about debt maturity, default, investment, and leverage policies. We distinguish between short-term liquidity uncertainty and long-term solvency uncertainty in order to clarify how the two sources of uncertainty affect such decisions of the firm. If debt maturity is exogenously determined, it is important to note that the effect of long-term solvency uncertainty on the investment policy-debt overhang-is opposite to that of short-term liquidity uncertainty. If debt maturity is endogenously determined, we show that the equilibrium debt maturity inceases (decreases) with short-term liquidity (long-term solvency) uncertainty when the chosen debt maturity is sufficiently long, and that for any debt maturity the firm's incentives to default increase (decrease) with short-term liquidity (long-term solvency) uncertainty whereas the firm's incentives to invest decrease (increase) with short-term liquidity (long-term solvency) uncertainty.

Suggested Citation

  • Hiroshi Osano & Keiichi Hori, 2017. "Debt Maturity, Default, and Investment under Rollover Risk and Solvency Concern," KIER Working Papers 979, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:979
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP979.pdf
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    More about this item

    Keywords

    debt maturity; debt overhang; debt rollover; investment; learning.;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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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