Short-Term Debt and Incentives for Risk-Taking

67 Pages Posted: 9 Dec 2016 Last revised: 26 Jun 2019

See all articles by Marco Della Seta

Marco Della Seta

APG - Asset Management

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Francesca Zucchi

European Central Bank

Date Written: February 22, 2019


We challenge the view that short-term debt curbs moral hazard and analytically demonstrate that, in a world with financing frictions and fair debt pricing, short-term debt increases incentives for risk-taking. To do so, we develop a model in which firms are financed with equity and short-term debt and cannot freely optimize their default decision because of financing frictions. Using this model, we show that short-term debt can give rise to a "rollover trap," a scenario in which firms burn revenues and cash reserves to absorb severe rollover losses. In the rollover trap, shareholders find it optimal to increase asset risk in an attempt to improve interim debt repricing and prevent inefficient liquidation. These risk-taking incentives do not arise when debt maturity is sufficiently long.

Keywords: Short-term debt financing, financing frictions, rollover risk, risk-taking

JEL Classification: G32, G35

Suggested Citation

Della Seta, Marco and Morellec, Erwan and Zucchi, Francesca, Short-Term Debt and Incentives for Risk-Taking (February 22, 2019). Swiss Finance Institute Research Paper No. 19-21, Available at SSRN: or

Marco Della Seta

APG - Asset Management ( email )

Gustav Mahlerplein 3
Amsterdam, 1082 MS

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015


Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Francesca Zucchi

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314

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