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Strategic Actions and Credit Spreads: An Empirical Investigation
Author(s) -
DAVYDENKO SERGEI A.,
STREBULAEV ILYA A.
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01288.x
Subject(s) - bargaining power , creditor , debt , debt service coverage ratio , monetary economics , business , bond , ex ante , strategic interaction , bond market , financial system , economics , finance , external debt , microeconomics , macroeconomics
Do strategic actions of borrowers and lenders affect corporate debt values? We find higher bond spreads for firms that can renegotiate debt contracts relatively easily. Consistent with theories of strategic debt service, the threat of strategic default depresses bond values ex ante, even though there may be efficiency gains from renegotiation ex post. However, the economic significance of the net effect is small, suggesting that bondholders have considerable bargaining power. The effect of strategic actions is higher when creditors are particularly vulnerable to strategic threats, including risky firms with high managerial shareholding, simple debt structures, and high liquidation costs.