Debt Market Liquidity and Corporate Default Prediction

Deming Wu () and Suning Zhang ()
Additional contact information
Deming Wu: Office of the Comptroller of the Currency, United States Department of the Treasury, 400 7th Street SW, Mail Stop 6E-3, Washington, DC 20219, USA
Suning Zhang: Department of Accounting, School of Management, George Mason University, USA

Quarterly Journal of Finance (QJF), 2014, vol. 04, issue 04, 1-33

Abstract: Recent research on the subprime crisis and rollover risk suggests that debt market liquidity is a major factor affecting the risk of default. This implies that firms that rely heavily on short-term debt, such as commercial paper (CP), are at greater risk of default. Debt market illiquidity could reduce the value of the firm and thus impact the firm's leverage, which is a major factor in predicting default. We estimate the effect of debt market conditions on the probability of default with a discrete-time dynamic hazard model that takes into account measurement error in firm leverage. Our results indicate that rollover risk is a significant factor in causing default, but the risk was higher for nonfinancial firms around 2000–2001 and considerably less entering the subprime crisis.

Keywords: Corporate default prediction; liquidity pricing; market valuation; book value accounting; debt market liquidity; rollover risk; G33; G32; G01; C53 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2010139215500032

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