Rollover risk, cash holdings and credit spreads: An empirical research

Abstract

The recent financial crisis from 2008-09 brought with it a lot of consequences. One of these correspond to the notorious growth in the spread of corporate bonds. According to the literature, the principal factors that explains that effect are default risk and liquidity risk. However, in the last year, two variables have become relevant as determinants of corporate bond spreads: rollover risk and cash holdings. Despite the above, there are no literature that consider both variables, rollover risk and cash holdings, in one model to explain their joint effects on corporate bond spreads. The intuition says that higher level of cash holding should decrease the impact of rollover risk on corporate bond spreads. All of this are the main reason and motivation of this thesis, to contribute to an unexplored area: the joint impact of rollover risk and cash holdings on spreads, studying the impact of these two variables from different perspectives and scenarios. The central question of this study, is to explore whether increasing the level of cash holdings reduce the effect of rollover risk on the corporate bond spreads. To do this study I use a regression model on corporate bond spreads considering its respective explanatory variables, which was taken from existent literature. The data used in this study is the same used in Valenzuela (2016). The period of the study starts in January 2004 and finishes in June 2009, in that way we are able to see the effects of the financial crisis. The dataset consists of month-end data and considers all fixed-rate bonds denominated in U.S. dollars and available to Bloomberg in June 2009. After all the results obtained, and consistent with the studies of rollover risk and cash holdings, this paper demonstrates that the effect of short term debt to total debt on corporate bond spreads is decreased by a higher level of cash holdings. These results remains when we control for potential endogeneity problems. In this way, this paper contributes in the empirical study of corporate bond spreads, and the influence that rollover risk and cash holdings have on this in different scenarios, maturities and industries.