Optimal capital structure and credit spreads under pandemic shocks

Yanming Yao and Pengfei Luo

Economics Letters, 2023, vol. 224, issue C

Abstract: We develop a capital structure model under pandemic shocks and highlight the implications of pandemic shocks on valuation of firm’s securities, optimal capital structure and credit spreads. We find that equity value is concave when the infected population is small and is convex when the infected population is large. In addition, an increase in volatility of infected population and a decrease in transmission rate will lead firms to choose more debt. Last, credit spreads are negatively correlated with volatility of infected population and positively correlated with transmission rate. Our results are consistent with some empirical findings.

Keywords: Pandemic shocks; Capital structure; Credit spreads (search for similar items in EconPapers)
JEL-codes: E20 G01 H56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176523000344
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:224:y:2023:i:c:s0165176523000344

DOI: 10.1016/j.econlet.2023.111009

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().