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Debt Maturity Structure and Credit Quality

Published online by Cambridge University Press:  08 September 2014

Radhakrishnan Gopalan ,
Fenghua Song  and
Vijay Yerramilli
Radhakrishnan Gopalan
Affiliation:
[email protected], Olin Business School, Washington University in St. Louis, Campus Box 1133, St. Louis, MO 63130
Fenghua Song
Affiliation:
[email protected], Smeal College of Business, Pennsylvania State University, 312 Business Bldg, University Park, PA 16802
Vijay Yerramilli
Affiliation:
[email protected], Bauer College of Business, University of Houston, 240D Melcher Hall, Houston, TX 77204.
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Abstract

We examine whether a firm’s debt maturity structure affects its credit quality. Consistent with theory, we find that firms with greater exposure to rollover risk (measured by the amount of long-term debt payable within a year relative to assets) have lower credit quality; long-term bonds issued by those firms trade at higher yield spreads, indicating that bond market investors are cognizant of rollover risk arising from a firm’s debt maturity structure. These effects are stronger among firms with a speculative-grade rating and declining profitability, and during recessions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 4 , August 2014 , pp. 817 - 842
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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