Same Firm, Different Betas

Abstract

Models of integrated asset markets predict that the debt and equity of the same firm have similar exposure to systematic risk. However, controlling for default probability, firms with a higher proportion of asset level systematic risk do not have commensurately higher spreads on either their vanilla bonds or synthetic bonds derived from option prices. More, the equity and debt of a firm do not share correlated factor exposures or expected returns as predicted in this class of models. In line with extent empirical asset pricing research, systematic risk proportion does explain credit spreads when estimated from a firm's bond returns. These results do not appear to be driven by differential exposure to volatility shocks and support a segmented markets approach to pricing a firm's securities.

Keywords: Credit Spreads, Systematic Risk, Empirical Asset Pricing, Segmented Markets

JEL Classification: G10, G12