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Macroeconomic Conditions, Growth Opportunities and the Cross-Section of Credit Risk

Author

Listed:
  • Marc ARNOLD

    (University of Zurich (SFI PhD Program))

  • Alexander F. WAGNER

    (University of Zurich and Swiss Finance Institute)

  • Ramona WESTERMANN

    (University of Geneva (SFI PhD Program))

Abstract

This paper develops a dynamic trade-off model of optimal capital structure that takes into ac- count the fact that most firms have both invested assets and growth opportunities. These two sources of value react quite differently to business cycle risk. In particular, growth options are more sensitive to regime changes than invested assets. "Growth firms" are, therefore, endoge- nously more likely to default in recession, when doing so is expensive. This in turn raises their costs of debt. The model quantitatively matches average stylized facts regarding credit spreads, leverage, default and investment clustering. Importantly, it also makes predictions about the cross-section of all these features.

Suggested Citation

  • Marc ARNOLD & Alexander F. WAGNER & Ramona WESTERMANN, 2010. "Macroeconomic Conditions, Growth Opportunities and the Cross-Section of Credit Risk," Swiss Finance Institute Research Paper Series 10-19, Swiss Finance Institute, revised Jul 2010.
    • Handle: RePEc:chf:rpseri:rp1019
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    File URL: http://ssrn.com/abstract=1570353
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    More about this item

    Keywords

    Capital structure; macroeconomic risk; growth opportunities; credit spread puzzle; under-leverage puzzle;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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