Rollover Risk and the Dynamics of Debt
40 Pages Posted: 26 Nov 2014 Last revised: 30 Apr 2018
Date Written: April 23, 2018
I study how firms adjust leverage, maturity and cash to manage rollover risk, and show that time-variation in concentration of maturity dates arises endogenously. To avoid rollover risk, firms prefer long-term debt with dispersed maturity dates. However, severe negative shocks force firms to borrow above an optimal level. They issue short-term debt as a commitment to delever in the next period. This concentrates maturity dates in the next period. The calibrated version of the model matches several empirical facts: more profitable firms have high leverage, use longer maturity bonds and stagger their maturity dates.
Keywords: Rollover Risk, Liquidity Policy, Cash, Maturity Structure, Dynamic Maturity, Dynamic Leverage
JEL Classification: G32, G33
Suggested Citation: Suggested Citation