Effect of short-term debt on default risk: Evidence from Pacific Basin countries

Chih-Wei Wang and Wan-Chien Chiu

Pacific-Basin Finance Journal, 2019, vol. 57, issue C

Abstract: This study examines the extent to which a firm’s short-term debt affects its default probability in five Pacific Basin countries (Australia, South Korea, Malaysia, Singapore, and Taiwan) during 2002–2015. We alleviate concerns about the endogeneity of short-term debt by using long-term debt obligations that matured in the next year. One standard deviation in this measure leads to a significant increase in the default probability within one year by 10%–34%, depending on country. The effect of the rollover risk increasing default probability is stronger in a crisis, for firms experiencing declines in profitability, and under poor credit conditions. Reserving liquidity (i.e., more cash holdings or less financial constraints) acts as a buffer against the rollover risk effect. Overall, our findings support the view that firms that face more difficulty with debt turnover have a higher likelihood of default.

Keywords: Short-term debt; Default risk; Rollover risk; Asset substitution (search for similar items in EconPapers)
JEL-codes: G00 G18 G21 G32 G33 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x18300209

DOI: 10.1016/j.pacfin.2018.05.008

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