Credit spreads and investment opportunities

Credit spreads and investment opportunities 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Credit spreads and investment opportunities

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-015-0545-x
Publisher site
See Article on Publisher Site

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Dec 9, 2015

References

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