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Value investing in credit markets

Author

Listed:
  • Maria Correia

    (London Business School)

  • Scott Richardson

    (London Business School)

  • İrem Tuna

    (London Business School)

Abstract

We outline a parsimonious empirical model to assess the relative usefulness of accounting- and equity market-based information to explain corporate credit spreads. The primary determinant of corporate credit spreads is the physical default probability. We compare existing accounting-based and market-based models to forecast default. We then assess whether the credit market completely incorporates this default information into credit spreads. We find that credit spreads reflect information about forecasted default rates with a significant lag. This unique evidence suggests a role for value investing in credit markets.

Suggested Citation

  • Maria Correia & Scott Richardson & İrem Tuna, 2012. "Value investing in credit markets," Review of Accounting Studies, Springer, vol. 17(3), pages 572-609, September.
    • Handle: RePEc:spr:reaccs:v:17:y:2012:i:3:d:10.1007_s11142-012-9191-x
    DOI: 10.1007/s11142-012-9191-x
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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