Industry Characteristics, Risk Premiums, and Debt Pricing

Posted: 13 Mar 2014 Last revised: 7 Mar 2016

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation

Gil Sadka

University of Texas at Dallas

Date Written: March 6, 2016

Abstract

Despite theoretical and anecdotal evidence highlighting the importance of industry-level analyses to lenders, the empirical literature on debt pricing has focused almost exclusively on firm-level forces that affect expected loss. This paper provides empirical evidence that industry-level characteristics relate to debt pricing through risk premiums. We address the empirical challenges that arise when testing these theories by using a proprietary dataset of time-varying and forward-looking measures of industry characteristics. These characteristics include growth, sensitivity to external shocks, and industry structure, all measured at the six-digit NAICS level. Our results show that lenders demand higher spreads to bear industry-level risk. The relation exists within subsamples with constant credit ratings, and strengthens when lenders' loan portfolios are less diversified and during periods when diversification is difficult. Therefore, our results suggest that industry characteristics relate to debt pricing by informing lenders not only about expected loss but also about risk premiums.

Keywords: Debt, Probability of Default, Loss Given Default, Industry Characteristics

JEL Classification: G31, G32, G33, M21

Suggested Citation

Amiram, Dan and Kalay, Alon and Sadka, Gil, Industry Characteristics, Risk Premiums, and Debt Pricing (March 6, 2016). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2408096 or http://dx.doi.org/10.2139/ssrn.2408096

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,407
PlumX Metrics