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Strategic Actions and Credit Spreads: An Empirical Investigation

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  • SERGEI A. DAVYDENKO
  • ILYA A. STREBULAEV

Abstract

Do strategic actions of borrowers and lenders affect corporate debt values? We find higher bond spreads for firms that can renegotiate debt contracts relatively easily. Consistent with theories of strategic debt service, the threat of strategic default depresses bond values ex ante, even though there may be efficiency gains from renegotiation ex post. However, the economic significance of the net effect is small, suggesting that bondholders have considerable bargaining power. The effect of strategic actions is higher when creditors are particularly vulnerable to strategic threats, including risky firms with high managerial shareholding, simple debt structures, and high liquidation costs.

Suggested Citation

  • Sergei A. Davydenko & Ilya A. Strebulaev, 2007. "Strategic Actions and Credit Spreads: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 62(6), pages 2633-2671, December.
  • Handle: RePEc:bla:jfinan:v:62:y:2007:i:6:p:2633-2671
    DOI: 10.1111/j.1540-6261.2007.01288.x
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