Growth Options, Macroeconomic Conditions and the Cross-Section of Credit Risk
Journal
Journal of Financial Economics
ISSN
0304-405X
ISSN-Digital
1879-2774
Type
journal article
Date Issued
2013-02
Author(s)
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.
Language
English
Keywords
Asset composition
capital structure
credit spread puzzle
equity premium
growth options
macroeconomic risk
value premium
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
107
Number
2
Start page
350
End page
385
Pages
36
Subject(s)
Eprints ID
210192