Rollover Risk and Credit Risk

This paper models a \u85rms rollover risk generated by the conict of interest between debt and equity holders. When the \u85rm faces rollover losses in rolling over its maturing debt, its equity holders are willing to absorb the rollover losses only if the option value of keeping the \u85rm alive justi\u85es the cost of paying o¤ the maturing debt. Our model shows that both deteriorating market liquidity and shorter debt maturity can exacerbate this externality and cause costly \u85rm bankruptcy at higher fundamental thresholds. Our model provides implications on liquidity-spillover e¤ects, the ight-to-quality phenomenon, and \u85rmsopti-mal debt maturity structures