Rollover Traps

Marco Della Seta, Erwan Morellec and Francesca Zucchi
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Marco Della Seta: University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)
Erwan Morellec: Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Francesca Zucchi: Federal Reserve Board

No 16-19, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We model the effects of debt maturity and cash holdings on default risk. When firms have short-term debt outstanding, negative operating shocks lead to a drop in liquid reserves and may cause firms to suffer losses when rolling over their debt, due to weaker fundamentals. This amplification mechanism gets more pronounced as debt maturity decreases, increases default risk, and can give rise to a rollover trap, a scenario in which firms burn their cash flows and cash reserves due to severe rollover losses. High exposure to rollover risk can also make claimholders risk-loving and lead distressed firms to implement gambling strategies.

Keywords: Short-term debt financing; rollover risk; financial amplification (search for similar items in EconPapers)
JEL-codes: G32 G35 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2016-03
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1619

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