Leverage Expectations and Bond Credit Spreads
Stanislava (Stas) Nikolova and
Authors registered in the RePEc Author Service: Ozde Oztekin ()
Journal of Financial and Quantitative Analysis, 2012, vol. 47, issue 4, 689-714
In an efficient market, spreads will reflect both the issuerâ€™s current risk and investorsâ€™ expectations about how that risk might change over time. Collin-Dufresne and Goldstein (2001) show analytically that a firmâ€™s expected future leverage importantly influences the spread on its bonds. We use capital structure theory to construct proxies for investorsâ€™ expectations about future leverage changes and find that these significantly affect bond yields, above and beyond the effect of contemporaneous leverage. Expectations under the trade-off, pecking order, and credit-rating theories of capital structure all receive empirical support, suggesting that investors view them as complementary when pricing corporate bonds.
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