Debt Maturity Structure and Credit Quality∗

We examine whether a firm’s debt maturity structure affects its credit quality. We find that firms with a larger proportion of their debt maturing within the year (short-term debt) are more likely to experience a severe fall in their credit quality in the following year, as measured by the severity of credit rating downgrades and the propensity to default. This effect is stronger for firms with declining profitability and during recession years. Our results are robust to instrumenting for the proportion of short-term debt and alternate measures of a firm’s exposure to rollover risk. We also find that longterm bonds issued by firms with a larger proportion of short-term debt trade at higher yield spreads, ceteris paribus, which indicates that bond market investors are cognizant of rollover risk. Overall, our results are broadly consistent with theories which argue that short-term debt exposes a firm to rollover risk, thereby increasing the firm’s overall