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

Wang, C.-W., Chiu, W.-C. and Peña, J. I. (2017) Effect of rollover risk on default risk: evidence from bank financing. International Review of Financial Analysis, 54, pp. 130-143. (doi: 10.1016/j.irfa.2016.09.009)

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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Chiu, Dr Wan-Chien
• Authors: Wang, C.-W., Chiu, W.-C., and Peña, J. I.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: International Review of Financial Analysis
• Publisher: Elsevier
• ISSN: 1057-5219
• ISSN (Online): 1873-8079
• Published Online: 13 September 2016
• Copyright Holders: Copyright © 2016 Elsevier Inc.
• First Published: First published in International Review of Financial Analysis 54:130-143
• Publisher Policy: Reproduced in accordance with the publisher copyright policy