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Rollover Risk and Credit Risk

Author

Listed:
  • Wei Xiong

    (Princeton University)

  • Zhiguo He

    (University of Chicago)

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.

Suggested Citation

  • Wei Xiong & Zhiguo He, 2010. "Rollover Risk and Credit Risk," 2010 Meeting Papers 98, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:98
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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