Strategic Actions and Credit Spreads: An Empirical Investigation
41 Pages Posted: 18 May 2003 Last revised: 31 Mar 2010
Date Written: April 1, 2004
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: Suggested Citation