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Debt Refinancing And Credit Risk

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  • Santiago Forte

    ()

  • J. Ignacio Peña

    ()

Abstract

Many firms choose to refinance their debt. We investigate the long run effects of this extended practice on credit ratings and credit spreads. We find that debt refinancing generates systematic rating downgrades unless a minimum firm value growth is observed. Deviations from this growth path imply asymmetric results: A lower value growth generates downgrades and a higher value growth upgrades as expected. However, downgrades will tend to be higher in absolute terms. On the other hand, credit spreads will be independent of the risk free interest rate in the short run, but positively correlated with this rate in the long run.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb031704.

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Date of creation: Mar 2003
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Handle: RePEc:cte:wbrepe:wb031704

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  1. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
  3. Delianedis, Gordon & Geske, Robert, 1998. "Credit Risk and Risk Neutral Default Probabilities: Information About Migrations and Defaults," University of California at Los Angeles, Anderson Graduate School of Management qt7dm2d31p, Anderson Graduate School of Management, UCLA.
  4. Hansen, Robert S & Crutchley, Claire, 1990. "Corporate Earnings and Financings: An Empirical Analysis," The Journal of Business, University of Chicago Press, vol. 63(3), pages 347-71, July.
  5. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
  6. Gande, Amar, et al, 1997. "Bank Underwriting of Debt Securities: Modern Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1175-1202.
  7. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May.
  8. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
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Cited by:
  1. Maria Carmen Badia Batlle & M. Mercedes Galisteo Rodriguez & M. Teresa Preixens Benedicto, 2006. "Un modelo de riesgo de credito basado en opciones compuestas con barrera. Aplicacion al mercado continuo espanol," Working Papers in Economics 156, Universitat de Barcelona. Espai de Recerca en Economia.

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