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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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    Cited by:

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    2. Traut, J. & Simonov, A. & Meitner, M., 2022. "Quantifying Alpha of Active Managers: A Case Study on Factor-Based Performance Attribution in Fixed-Income," Research Journal for Applied Management (RJAM), International School of Management (ISM), Dortmund, vol. 3(1), pages 85-115.
    3. Yiwei Dou & Yanju Liu & Gordon Richardson & Dushyantkumar Vyas, 2014. "The risk-relevance of securitizations during the recent financial crisis," Review of Accounting Studies, Springer, vol. 19(2), pages 839-876, June.
    4. Annita Florou & Urska Kosi, 2015. "Does mandatory IFRS adoption facilitate debt financing?," Review of Accounting Studies, Springer, vol. 20(4), pages 1407-1456, December.
    5. Correia, Maria, 2025. "Accounting and corporate failure: the evolving role of accounting information in bankruptcy prediction," LSE Research Online Documents on Economics 128340, London School of Economics and Political Science, LSE Library.

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    Keywords

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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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