Debt Rollover Risk, Credit Default Swap Spread and Stock Returns: Evidence from the COVID-19 Crisis

Abstract

This paper studies how the COVID-19 shock affects the CDS spread changes and abnormal stock returns of U.S. firms with different levels of debt rollover risk. We use the COVID-19 crisis as a quasi-natural experiment of adverse cash flow shock that increases the default risk of firms facing an immediate liquidity shortfall. We find that the COVID-19 shock significantly increased the CDS spread and decreased the shareholder value for firms facing higher debt rollover risk. The effect is stronger for non-financial firms, for firms that are financially constrained, and for firms that are highly volatile. Moreover, we find that firms with immediate refinancing needs suffered more than firms with distant refinancing needs during the COVID-19 shock, which further confirms that firms’ debt rollover risk is indeed a key factor that drives the heterogenous reactions to the shock. The paper provides fresh insights into the role of firms’ debt rollover risk during the COVID-19 health crisis.