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The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads
Author(s) -
Rojahn Joachim,
Zechser Florian
Publication year - 2019
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12306
Subject(s) - diversification (marketing strategy) , credit default swap , corporate bond , credit risk , credit default swap index , business , credit rating , financial economics , economics , bond , systematic risk , monetary economics , financial system , actuarial science , credit valuation adjustment , finance , credit reference , marketing
This article investigates the impact of corporate diversification on credit risk. To our best knowledge, this is the first paper to use credit default swap ( CDS ) spreads instead of bond yield or revalued book values to test the risk‐reduction hypothesis. The analysis relies upon a sample of STOXX ® EUROPE 600 index members and covers the years 2010–2014. After controlling for various CDS ‐ and firm‐specific variables, we find that diversification strategies do not significantly lower CDS premiums. Multilevel mediation analysis further shows that information asymmetries overcompensate the risk‐reducing effects resulting from corporate diversification.