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Growth Options and Credit Risk

Author

Listed:
  • Andrea Gamba

    (Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom)

  • Alessio Saretto

    (Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080)

Abstract

We calibrate a dynamic model of credit risk and analyze the relation between growth options and credit spreads. Our model features real and financing frictions, a technology with decreasing returns to scale, and endogenous investment options driven by both systematic and idiosyncratic shocks. We find a negative relation between credit spreads and growth options after controlling for determinants of credit risk. This negative relation is a result of the current decision to invest and the associated change in leverage, which, in the presence of external financing needs and financing frictions, increase credit spreads while reducing the value of future investments. We do not find evidence that growth options accrue value in response to systematic risk, thus increasing credit risk premia.

Suggested Citation

  • Andrea Gamba & Alessio Saretto, 2020. "Growth Options and Credit Risk," Management Science, INFORMS, vol. 66(9), pages 4269-4291, September.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:9:p:4269-4291
    DOI: 10.287/mnsc.2019.3387
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    References listed on IDEAS

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    2. Yuanyue Wang & Zhaohui Yu & Xiaojing Yi, 2022. "Financing liabilities and inefficient investment of listed companies: Based on the adjustment effect of different financial structures," Australian Economic Papers, Wiley Blackwell, vol. 61(4), pages 848-875, December.
    3. Xie, Xiaofeng & Shi, Xinyu & Gu, Jing & Xu, Xun, 2023. "Examining the Contagion Effect of Credit Risk in a Supply Chain under Trade Credit and Bank Loan Offering," Omega, Elsevier, vol. 115(C).

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