The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

Joachim Rojahn and Florian Zechser

Accounting and Finance, 2019, vol. 59, issue 4, 2679-2704

Abstract: This article investigates the impact of corporate diversification on credit risk. To our best knowledge, this is the first paper to use credit default swap (CDS) spreads instead of bond yield or revalued book values to test the risk‐reduction hypothesis. The analysis relies upon a sample of STOXX® EUROPE 600 index members and covers the years 2010–2014. After controlling for various CDS‐ and firm‐specific variables, we find that diversification strategies do not significantly lower CDS premiums. Multilevel mediation analysis further shows that information asymmetries overcompensate the risk‐reducing effects resulting from corporate diversification.

Date: 2019
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