Effect of short-term debt on default risk: Evidence from Pacific Basin countries

This study examines the extent to which a firm's short-term debt affects its default probability in five Pacific Basin countries (Australia, South Korea, Malaysia, Singapore, and Taiwan) during 2002–2015. We alleviate concerns about the endogeneity of short-term debt by using long-term debt obligations that matured in the next year. One standard deviation in this measure leads to a significant increase in the default probability within one year by 10%–34%, depending on country. The effect of the rollover risk increasing default probability is stronger in a crisis, for firms experiencing declines in profitability, and under poor credit conditions. Reserving liquidity (i.e., more cash holdings or less financial constraints) acts as a buffer against the rollover risk effect. Overall, our findings support the view that firms that face more difficulty with debt turnover have a higher likelihood of default.