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Erschienen in: Review of Quantitative Finance and Accounting 1/2017

09.12.2015 | Original Research

Credit spreads and investment opportunities

verfasst von: Tao Shen

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2017

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Abstract

Do credit spreads signal firm investment opportunities just like Tobin’s q? Because both credit spreads and Tobin’s q are market prices, they should contain similar information about the firm. I develop an investment model in which an analytical relation is established between the marginal q and the credit spreads. Using U.S. firm-level data, I find that credit spreads are a statistically important predictor of firm investment and their explanatory power is higher than that of Tobin’s q. The empirical evidence shows that credit spreads capture the effects of financial frictions, which drive a wedge between marginal and Tobin’s q.

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1
Perhaps the most prominent example of the empirical failure of q-theory is the investment cash-flow sensitivity. Since the seminal work of Fazzari et al. (1988) and summarized by Hubbard (1998), a lot of empirical papers show that investment responds strongly to movements in internal funds (proxied by cash flow) even after one controls for Tobin’s q. However, the recent literature (e.g., Kaplan and Zingales 1997; Erickson and Whited 2000; Alti 2003) finds that cash-flow sensitivity may not be the direct evidence for the failure of q-theory. Chen and Chen (2012) find that its effects diminish over time.
 
2
Lehman Brothers collects bid prices from its dealers for bonds that are either traded by the firm or tracked by one of its published bond indices. In months where no bid is posted, a matrix price is recorded as a “best guess”.
 
3
Gurkaynak et al. (2007) estimate the U.S. Treasury yield curve from 1961 to date and their daily continuously compounded zero-coupon yields range from 1 to 30 years. I interpolate those yields to get monthly data using cubic method so that on each transaction day we know the risk free discount factors for those cash flows. The data are available at http://​www.​federalreserve.​gov/​pubs/​feds/​2006/​200628/​200628abs.​html.
 
4
The numeric values for bond ratings are 1 (Aaa), 2 (Aa1), 3 (Aa2), 4 (Aa3), 5 (A1), 6 (A2), 7 (A3), 8 (Baa1), 9 (Baa2), 10 (Baa3), 11 (Ba1), 12 (Ba2), 13 (Ba3), 14 (B1), 15 (B2), 16 (B3), 17 (Caa1), 18 (Caa2), 19 (Caa3), 20 (Ca), 21 (C), and 25 (D).
 
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Metadaten
Titel
Credit spreads and investment opportunities
verfasst von
Tao Shen
Publikationsdatum
09.12.2015
Verlag
Springer US
Erschienen in
Review of Quantitative Finance and Accounting / Ausgabe 1/2017
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-015-0545-x

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