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The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

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  • Joachim Rojahn
  • Florian Zechser

Abstract

This article investigates the impact of corporate diversification on credit risk. To our best knowledge, this is the first paper to use credit default swap (CDS) spreads instead of bond yield or revalued book values to test the risk‐reduction hypothesis. The analysis relies upon a sample of STOXX® EUROPE 600 index members and covers the years 2010–2014. After controlling for various CDS‐ and firm‐specific variables, we find that diversification strategies do not significantly lower CDS premiums. Multilevel mediation analysis further shows that information asymmetries overcompensate the risk‐reducing effects resulting from corporate diversification.

Suggested Citation

  • Joachim Rojahn & Florian Zechser, 2019. "The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(4), pages 2679-2704, December.
    • Handle: RePEc:bla:acctfi:v:59:y:2019:i:4:p:2679-2704
    DOI: 10.1111/acfi.12306
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    Cited by:

    1. Mary S. Hill & Gary K. Taylor, 2023. "Default risk and earnings expectations: The role of contract maturity in the credit default swap market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4275-4298, December.

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