Firms’ rollover risk, capital structure and unequal exposure to aggregate shocks
Sharjil Haque and
Richard Varghese
Journal of Corporate Finance, 2023, vol. 80, issue C
Abstract:
We examine how debt rollover risk affects firms’ capital structure following aggregate profitability shocks. Exploiting plausibly exogenous variation in perceived exposure to the Covid-19 pandemic, we find firms that are highly exposed to both rollover risk and aggregate shocks significantly raise leverage, compared to less exposed firms. The effect is amplified when regulators provide liquidity support to debt markets. Higher exposure to both risks, and consequent increase in leverage, leads to substantially diminished distance to default. We show the increase in leverage is consistent with standard trade-off theory, suggesting equity-holders tolerate a lower distance to default as long as cash flows received in continuation exceed that received in bankruptcy. Overall, our findings highlight how financial constraints can meaningfully affect firm policies following negative economic shocks.
Keywords: Corporate debt; Capital structure; Rollover risk; Default risk; Trade-off theory; Central bank intervention (search for similar items in EconPapers)
JEL-codes: G00 G10 G30 G32 G33 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:80:y:2023:i:c:s0929119923000652
DOI: 10.1016/j.jcorpfin.2023.102416
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