Strategic Actions and Credit Spreads: An Empirical Investigation

41 Pages Posted: 18 May 2003 Last revised: 31 Mar 2010

See all articles by Sergei A. Davydenko

Sergei A. Davydenko

University of Toronto - Finance Area

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Date Written: April 1, 2004

Abstract

Do strategic actions of borrowers and lenders affect corporate debt value? Our evidence indicates that they do, though the economic significance of the effect is limited. The possibility of renegotiation on average increases corporate debt spreads by 2-8 basis points due to the threat of strategic default, despite possible ex post efficiency gains to renegotiation. The impact is higher when the bondholders' bargaining position is likely to be weak, including firms with high managerial shareholding, simple debt structures, and high liquidation costs. On balance, although incorporating strategic behavior may improve the cross-sectional performance of debt pricing models, it is unlikely to remedy their inability to predict the general level of spreads.

Keywords: credit spreads, strategic debt service, capital structure, credit risk, renegotiation, bargaining power

JEL Classification: G12, G32, G33

Suggested Citation

Davydenko, Sergei A. and Strebulaev, Ilya A., Strategic Actions and Credit Spreads: An Empirical Investigation (April 1, 2004). Journal of Finance, Forthcoming, AFA 2004 San Diego Meetings, EFA 2003 Glasgow Annual Conference Paper No. 896, Available at SSRN: https://ssrn.com/abstract=389663 or http://dx.doi.org/10.2139/ssrn.389663

Sergei A. Davydenko (Contact Author)

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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