Strategic Actions and Credit Spreads: An Empirical Investigation

SERGEI A. DAVYDENKO · Ilya A. Strebulaev

205 citations0/0 files storedThe Journal of Finance

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Credit Risk and Financial Regulations Corporate Finance and Governance Corporate Insolvency and Governance

Abstract

ABSTRACT Do strategic actions of borrowers and lenders affect corporate debt values? We find higher bond spreads for firms that can renegotiate debt contracts relatively easily. Consistent with theories of strategic debt service, the threat of strategic default depresses bond values ex ante, even though there may be efficiency gains from renegotiation ex post. However, the economic significance of the net effect is small, suggesting that bondholders have considerable bargaining power. The effect of strategic actions is higher when creditors are particularly vulnerable to strategic threats, including risky firms with high managerial shareholding, simple debt structures, and high liquidation costs.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1973Risk, Return, and Equilibrium: Empirical Tests 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1992Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt 1994Corporate Debt Value, Bond Covenants, and Optimal Capital Structure 1999Modeling Term Structures of Defaultable Bonds 1976VALUING CORPORATE SECURITIES: SOME EFFECTS OF BOND INDENTURE PROVISIONS 2001The Determinants of Credit Spread Changes

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