TY - JOUR
T1 - Do credit spreads reflect stationary leverage ratios?
AU - Collin-Dufresne, Pierre
AU - Goldstein, Robert S.
PY - 2001/10
Y1 - 2001/10
N2 - Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean-reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low-leverage firms, and less sensitive to changes in firm value, both of which are more consistent with empirical findings than predictions of extant models. Further, the term structure of credit spreads can be upward sloping for speculative-grade debt, consistent with recent empirical findings.
AB - Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean-reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low-leverage firms, and less sensitive to changes in firm value, both of which are more consistent with empirical findings than predictions of extant models. Further, the term structure of credit spreads can be upward sloping for speculative-grade debt, consistent with recent empirical findings.
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U2 - 10.1111/0022-1082.00395
DO - 10.1111/0022-1082.00395
M3 - Article
AN - SCOPUS:0039107315
SN - 0022-1082
VL - 56
SP - 1929
EP - 1957
JO - Journal of Finance
JF - Journal of Finance
IS - 5
ER -