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Growth Options, Macroeconomic Conditions and the Cross-Section of Credit Risk

Marc Arnold, Alexander Wagner & Ramona Westermann

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abstract This paper develops a structural equilibrium model with intertemporal macroeconomic risk, incorporating the fact that firms are heterogeneous in their asset composition. Compared to firms that are mainly composed of invested assets, firms with growth options have higher costs of debt because they are more volatile and have a greater tendency to default during recession when marginal utility is high and recovery rates are low. Our model matches empirical facts regarding credit spreads, default probabilities, leverage ratios, equity premiums, and investment clustering. Importantly, it also makes predictions about the cross-section of all these features.
   
type journal paper
   
keywords Asset composition, capital structure, credit spread puzzle, equity premium, growth options, macroeconomic risk, value premium
   
language English
kind of paper journal article
date of appearance 2-2013
journal Journal of Financial Economics
publisher Elsevier (Amsterdam)
ISSN 0304-405X
ISSN (online) 1879-2774
DOI 10.1016/j.jfineco.2012.08.017
volume of journal 107
number of issue 2
page(s) 350-385
review not reviewed
   
citation Arnold, M., Wagner, A., & Westermann, R. (2013). Growth Options, Macroeconomic Conditions and the Cross-Section of Credit Risk. Journal of Financial Economics, 107(2), 350-385, DOI:10.1016/j.jfineco.2012.08.017.