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Optimal capital structure and credit spreads under pandemic shocks

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  • Yao, Yanming
  • Luo, Pengfei

Abstract

We develop a capital structure model under pandemic shocks and highlight the implications of pandemic shocks on valuation of firm’s securities, optimal capital structure and credit spreads. We find that equity value is concave when the infected population is small and is convex when the infected population is large. In addition, an increase in volatility of infected population and a decrease in transmission rate will lead firms to choose more debt. Last, credit spreads are negatively correlated with volatility of infected population and positively correlated with transmission rate. Our results are consistent with some empirical findings.

Suggested Citation

  • Yao, Yanming & Luo, Pengfei, 2023. "Optimal capital structure and credit spreads under pandemic shocks," Economics Letters, Elsevier, vol. 224(C).
    • Handle: RePEc:eee:ecolet:v:224:y:2023:i:c:s0165176523000344
    DOI: 10.1016/j.econlet.2023.111009
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    References listed on IDEAS

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    More about this item

    Keywords

    Pandemic shocks; Capital structure; Credit spreads;
    All these keywords.

    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • G01 - Financial Economics - - General - - - Financial Crises
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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