Rollover risk in commercial paper markets andfirms‘ debt maturity choice

By using short-term direct finance firms of the highest credit quality exposethemselves to rollover risk in the public debt markets. Firms insure themselvesagainst this risk by securing backup lines of credit from banks that they mayuse should market liquidity dry up. In a first step, this paper explains whyhigh quality firms introduce a maturity mismatch into their balance sheetsand do not simply use long-term direct finance. It also highlights why banksmay be willing to roll over a firm’s debt while direct investors may not. In asecond step, I extend the model to allow for different levels of firm’s publiclyobservable credit quality. Under plausible assumptions about the cost of bankborrowing the model generates a maturity structure choice broadly consistentwith observed financing patterns: Low quality firms issue short-term directdebt, medium quality firms issue long-term direct debt, and high quality firmsuse short-term direct debt in normal times and bank debt in adverse times. Thepaper suggests that better publicly available information about firm quality andthe moderation of the business cycle over the past decade help to explain thedecrease in nonfinancial commercial paper outstanding since the beginning ofthe decade....