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Growth options and credit risk
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Gamba, Andrea and Saretto, Alessio (2020) Growth options and credit risk. Management Science, 66 (9). pp. 4269-4291. doi:10.1287/mnsc.2019.3387 ISSN 0025-1909.
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Official URL: https://doi.org/10.1287/mnsc.2019.3387
Abstract
We calibrate a dynamic model of credit risk and analyze the relation between growth options and credit spreads. Our model features real and financing frictions, a technology with decreasing returns to scale, and endogenous investment options driven by both systematic and idiosyncratic shocks. We find a negative relation between credit spreads and growth options, after controlling for determinants of credit risk. This negative relation is due to the current decision to invest and the associated change in leverage which, in the presence of external financing needs and financing frictions, increase credit spreads while reducing the value of future investments. We do not find evidence that growth options accrue value in response to systematic risk, thus increasing credit risk premia.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Credit -- Management, Risk management, Monetary policy, Economic development | ||||||||
Journal or Publication Title: | Management Science | ||||||||
Publisher: | Institute for Operations Research and the Management Sciences (I N F O R M S) | ||||||||
ISSN: | 0025-1909 | ||||||||
Official Date: | September 2020 | ||||||||
Dates: |
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Volume: | 66 | ||||||||
Number: | 9 | ||||||||
Page Range: | pp. 4269-4291 | ||||||||
DOI: | 10.1287/mnsc.2019.3387 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 29 April 2019 | ||||||||
Date of first compliant Open Access: | 21 May 2020 | ||||||||
Related URLs: | |||||||||
Open Access Version: |
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