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Equity misvaluation and debt markets

Author

Listed:
  • Bao, May Xiaoyan
  • Crabtree, Aaron
  • Morris, Marc
  • Wan, Huishan

Abstract

This study examines whether equity misvaluation is associated with credit risk. Credit risk can be argued as not being associated with equity misvaluation because equity misvaluation is noisy information relative to a borrower's intrinsic value. Instead, we hypothesize a nonlinear relationship between credit risk and firm misvaluation. We examine new bond issues between 1990 and 2018. Our results show that equity valuations higher than the intrinsic value are negatively associated with credit risk through higher credit ratings, lower bond yields, and a lower distance to default until analysts and creditors perceive that the firm becomes excessively overvalued. After that turning point, the association flips, and firm equity valuations become positively associated with credit risk.

Suggested Citation

  • Bao, May Xiaoyan & Crabtree, Aaron & Morris, Marc & Wan, Huishan, 2023. "Equity misvaluation and debt markets," Global Finance Journal, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:glofin:v:58:y:2023:i:c:s1044028323000972
    DOI: 10.1016/j.gfj.2023.100902
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    More about this item

    Keywords

    Misvaluation; Overvaluation; Cost of debt; Credit risk; Credit rating; Debt markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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