Credit spreads and investment opportunities

Tao Shen

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 1, No 5, 117-152

Abstract: Abstract Do credit spreads signal firm investment opportunities just like Tobin’s q? Because both credit spreads and Tobin’s q are market prices, they should contain similar information about the firm. I develop an investment model in which an analytical relation is established between the marginal q and the credit spreads. Using U.S. firm-level data, I find that credit spreads are a statistically important predictor of firm investment and their explanatory power is higher than that of Tobin’s q. The empirical evidence shows that credit spreads capture the effects of financial frictions, which drive a wedge between marginal and Tobin’s q.

Keywords: Tobin’s q; Investment; Credit spreads; Financial frictions (search for similar items in EconPapers)
JEL-codes: E22 G12 G30 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s11156-015-0545-x

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