67 Pages Posted: 4 Apr 2011 Last revised: 16 Oct 2012
Date Written: March 31, 2011
We outline a parsimonious empirical model to assess the relative usefulness of accounting and equity market based information to explain corporate credit spreads. The primary determinant of corporate credit spreads is the physical default probability. We compare existing accounting-based and market-based models to forecast default, and find that a modified structural model with accounting and market inputs is best able to forecast default and explain cross-sectional variation in credit spreads. We then assess whether the credit market completely incorporates this default information into credit spreads. Interestingly, we find that credit spreads reflect information about forecasted default rates with a significant lag. This evidence is suggestive of a role for value investing in credit markets.
Keywords: credit markets, CDS, bonds, default prediction
JEL Classification: G12, G14, M41
Suggested Citation: Suggested Citation
Correia, Maria M. and Richardson, Scott A. and Tuna, A. Irem, Value Investing in Credit Markets (March 31, 2011). Review of Accounting Studies, Vol. 17, No. 3, 2012. Available at SSRN: https://ssrn.com/abstract=1800212 or http://dx.doi.org/10.2139/ssrn.1800212