2011
DOI: 10.2139/ssrn.1474101
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Rollover Risk and Credit Risk

Abstract: Our model shows that deterioration in debt market liquidity leads to an increase in not only the liquidity premium of corporate bonds but also credit risk. The latter effect originates from firms' debt rollover. When liquidity deterioration causes a firm to suffer losses in rolling over its maturing debt, equity holders bear the losses while maturing debt holders are paid in full. This conflict leads the firm to default at a higher fundamental threshold. Our model demonstrates an intricate interaction between … Show more

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Cited by 101 publications
(82 citation statements)
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References 70 publications
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“…While recent research studies how liquidity risk causes or exacerbates the financial crisis (see, for instance, [29][30][31][32]), few empirical investigations have probed the relationships between bank failures and liquidity risk. One obvious reason for this is that there had been few bank failures globally between 1995 and 2007.…”
Section: Literature Review Of Liquidity and Bank Failurementioning
confidence: 99%
“…While recent research studies how liquidity risk causes or exacerbates the financial crisis (see, for instance, [29][30][31][32]), few empirical investigations have probed the relationships between bank failures and liquidity risk. One obvious reason for this is that there had been few bank failures globally between 1995 and 2007.…”
Section: Literature Review Of Liquidity and Bank Failurementioning
confidence: 99%
“…First, the debt-to-assets ratio captures the leverage of the industry, which reflects the industry's sensitivity to the availability of credit. Also, investors may perceive leveraged industries as more risky during a credit crunch, due to fears of refinancing problems (Sharpe, 1991;He and Xiong, 2012). In the estimations we test if debt maturity is important by distinguishing between short and long term debt.…”
Section: Specifying Control Variablesmentioning
confidence: 99%
“…Research shows that changes in market conditions during crises along with a deterioration in investors' expectations and increased risk aversion contribute to shortening debt maturities within individual debt markets (Erel et al, 2012;Chen et al, 2012;He and Milbradt, 2016;Mian and Santos, 2018). This shortening in debt maturities happens even when increased uncertainty during crises might induce debtors to borrow longer term to reduce refinancing risks (Graham and Harvey, 2001;Brunnermeier, 2009;Krishnamurthy, 2010;Almeida et al, 2011;He and Xiong, 2012;Broner et al, 2013;Diamond and He, 2014;Harford et al, 2014). The existing literature tends to draw its conclusions from analyses of individual debt markets, overlooking the effects of changes in debt issuance composition.…”
Section: Introductionmentioning
confidence: 99%