Effect of rollover risk on default risk: Evidence from bank financing |
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| Institution: | 1. Department of Finance, National Sun Yat-sen University, 70. Lianhai Rd., Kaohsiung, 804, Taiwan;2. Accounting and Finance, Adam Smith Business School, University of Glasgow, Glasgow, G12 8QQ, United Kingdom;3. Department of Business Administration, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Madrid, Spain;1. Bank of Canada, Canada;2. Federal Reserve Bank of New York, United States;3. Nova School of Business and Economics, Portugal;1. Smith School of Business, Queen''s University, Kingston, ON, K7L 3N6, Canada;2. Department of Finance and Decision Sciences, School of Business, Hong Kong Baptist University, Kowloon Tong, Hong Kong;1. Department of Quantitative Finance, National Tsing Hua University, Taiwan;2. Department of Finance, National Sun Yat-sen University, 70, Lianhai Rd., Kaohsiung 804, Taiwan;3. Department of Business Administration, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Madrid, Spain |
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| Abstract: | We study the effect of rollover risk on the risk of default using a comprehensive database of U.S. industrial firms during 1986–2013. Dependence on bank financing is the key driver of the impact of rollover risk on default risk. Default risk and rollover risk present a significant positive relation in firms dependent on bank financing. In contrast, rollover risk is uncorrelated with default probability in the case of firms that do not rely on bank financing. Our measure of rollover risk is the amount of long-term debt maturing in one year, weighted by total assets. In the case of a firm that depends on bank financing, an increase of one standard deviation in this measure leads to a significant increase of 3.2% in its default probability within one year. Other drivers affecting the interaction between rollover risk and default risk are whether a firm suffers from declining profitability and has poor credit. Additionally, rollover risk's impact on default probability is stronger during periods when credit market conditions are tighter. |
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