Effect of rollover risk on default risk: Evidence from bank financing

Chih Wei Wang, Wan Chien Chiu, Juan Ignacio Peña

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

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.

Original languageEnglish
Pages (from-to)130-143
Number of pages14
JournalInternational Review of Financial Analysis
Volume54
DOIs
StatePublished - Nov 2017

Keywords

  • Bank dependence
  • Debt maturity
  • Default risk
  • Rollover risk

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