Growth options, macroeconomic conditions, and the cross section of credit risk

Marc Arnold (), Alexander Wagner and Ramona Westermann

Journal of Financial Economics, 2013, vol. 107, issue 2, 350-385

Abstract: This paper develops a structural equilibrium model with intertemporal macroeconomic risk, incorporating the fact that firms are heterogeneous in their asset composition. Compared with firms that are mainly composed of invested assets, firms with growth options have higher costs of debt because they are more volatile and have a greater tendency to default during recession when marginal utility is high and recovery rates are low. Our model matches empirical facts regarding credit spreads, default probabilities, leverage ratios, equity premiums, and investment clustering. Importantly, it also makes predictions about the cross section of all these features.

Keywords: Capital structure; Credit spread puzzle; Growth options; Macroeconomic risk; Value premium (search for similar items in EconPapers)
JEL-codes: D92 E44 G12 G32 G33 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:107:y:2013:i:2:p:350-385

DOI: 10.1016/j.jfineco.2012.08.017

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