Corporate debt structure: The long and the short of it

Abstract

AbstractConsistent with the existence of a rollover risk channel, we document that an increase in short‐term debt proportional to the total debt increases the cost of long‐term debt. The effect of rollover risk is more pronounced for the firms that are vulnerable to unforeseen negative events. Moreover, we find that the marginal effect of short‐term debt on the yield spread is intensified during periods of market illiquidity. Finally, our results suggest that this positive effect on the yield spread due to increased rollover risk is partially offset by a negative effect due to the attenuation of underinvestment problems.