Rolling over Corporate Bonds: How Market Liquidity affects Credit Risk
Does bond liquidity affect credit risk via the corporate bond rollover channel? This paper explores this relation in the US corporate bond market, based on a complete set of transactions data, for firms with large exposures to the bond market. I provide a detailed analysis of debt capital structures and corporate bond rollover policies. A quasi-natural experiment based on the Lehman bankruptcy allows to examine the asset pricing implications associated with the rollover channel. The findings demonstrate that (i) bond liquidity impacts yield spreads via exposure to bond rollover and reveal economically sizeable average treatment effects. Furthermore, the impact (ii) is increasing in the size of the rollover exposure, (iii) is observable across the entire term-structure of yield spreads and (iv) is more pronounced for credit risky firms.