Debt Maturity, Firm Liquidity, and Equity Returns: European Evidence

Sammanfattning

This paper provides evidence that European firms that frequently refinance outstanding debt exhibit higher equity returns, but this premium is conditional on firm size and liquidity. We find that small firms that frequently rollover debt with a stable liquidity position have higher returns, whereas those with weaker liquidity face lower returns. The refinancing premium is consistent with greater exposure to rollover risk, a key risk for which equityholders demand compensation. Even so, refinancing when liquidity is constrained amplifies the risk of financial distress, reflected in a return discount rather than a premium. Our results suggest that corporate asset pricing should consider not only the maturity structure of debt but also its joint interplay with liquidity position and firm size.