Effect of Rollover Risk on Default Risk of Indian Firms: An Empirical Study

Abstract: The rollover risk is the primary reason for the Global Financial Crisis. Recently, the defaults of Indian non-banking financial companies and subsequent loss to investors have brought back the discussion of the importance of ascertaining the firm's debt maturity profile and rollover risk. In this light, this article examines the rollover risk effect on the default risk of Indian firms. The paper employs multiple linear regression on the sample of 30396 firm-year observations of 6718 publicly listed Indian corporates from 2009-2020 without any survivorship bias. The model uses Merton's (1974) Distance-to-Default (default risk of the firms) as the dependent variable, Rollover risk as the primary explanatory variable, and other firms' characteristics are taken as control variables. The empirical result proved the statistical and economic significance of rollover risk in impacting the default risk of the Indian corporates. If rollover risk increases by one-standard deviation, the distance-to-default decreases by 52.51% (i.e., increases their default chance). When considering the effect of other control variables, if rollover risk increases by one-standard deviation, the distance-to-default decreases by 14.89%. The empirical findings suggest that investors and lenders can benefit by analyzing the firms' debt maturity profile and rollover risk as they have a material impact on the default risk of the Indian firms. Keywords: Distance-to-Default, Default Risk, Rollover Risk JEL Classification Number: G00 G18 G21 G32 G33