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

Journal of Financial Stability, Forthcoming

79 Pages Posted: 3 Jun 2020 Last revised: 24 Feb 2021

See all articles by Ya Liu

Ya Liu

The University of Sydney - Discipline of Finance; University of Sydney Business School

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Teng Wang

Board of Governors of the Federal Reserve System

Date Written: January 14, 2021

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.

Keywords: Debt Rollover Risk; Credit Default Swap Spread; Stock Returns

JEL Classification: G01, G10, G14

Suggested Citation

Liu, Ya and Qiu, Buhui and Wang, Teng, Debt Rollover Risk, Credit Default Swap Spread and Stock Returns: Evidence from the COVID-19 Crisis (January 14, 2021). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3617500 or http://dx.doi.org/10.2139/ssrn.3617500

Ya Liu

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Buhui Qiu (Contact Author)

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Teng Wang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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