Credit Spreads, Debt Maturity and Assets Other than Those Included in Book Value

Abstract

Arora et al. (2014) provide evidence that the lack of precision in measurement of financial (i.e., level 1, 2, or 3) assets on the balance sheet of financial institutions appears to have affected short-term credit spreads more than long-term credit spreads during the global financial crisis (2007 to 2009). We extend their analysis by investigating the association between all firm assets not recorded on the balance sheet (unrecorded assets) and perceived default risks. We provide evidence that unrecorded assets are negatively associated with long-term credit default swap spreads (i.e., lower perceived default risk in the long-term) and positively associated with short-term credit default swap spreads (i.e., higher perceived default risk in the short-term). We attribute our findings to asset measurement issues and show that a stronger information environment may mitigate these issues for short-term default risk. Our evidence suggests that the relation between unrecorded assets and perceived default risk is context specific.