Accounting data and the credit spread: An empirical investigation

Amer Demirovic, Jon Tucker and Cherif Guermat

Research in International Business and Finance, 2015, vol. 34, issue C, 233-250

Abstract: Measures of credit risk based on Merton (1974) rely upon information available in the market prices of securities. Under the Efficient Market Hypothesis market prices should reflect all available information and, hence, make redundant all other information in the analysis of credit risk. This paper examines whether accounting data are fully reflected in the market-based measures of credit risk and therefore has no role in explaining variations in the credit spread on corporate bonds. We use a sample consisting of over 11,000 firm-quarter observations with matched equity, bond and accounting data. The results suggest that equity volatility and Merton's distance-to-default outperform accounting variables in explaining variations in the credit spread. However, accounting variables are incrementally informative in explaining variations in the credit spread when considered in conjunction with market-based measures. Within the set of accounting variables considered, we find that the profitability ratio is by far the most incrementally informative accounting variable.

Keywords: Credit spread; Credit risk analysis; Distance-to-default; Accounting data; Value relevance (search for similar items in EconPapers)
JEL-codes: C52 G12 G33 M41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:34:y:2015:i:c:p:233-250

DOI: 10.1016/j.ribaf.2015.02.013

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