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Rollover Risk and Credit Risk

  • Zhiguo He
  • Wei Xiong

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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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
Note: AP CF ME
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