The Effect of Division Relative Risk on Corporate Bond Yield Spread and Operating Performance

This study examines the relationship between firms’ division relative risk and their bond yield spreads/return on assets. We employ the method developed in Kruger, Landier, Thesmar(2015) to evaluate the relative risk between core division and non-core division. The empirical results of the study show that division relative risk is positively correlated with bond yield spreads and negatively correlated with return on assets. The results suggest that firms ignoring division relative risk and evaluating projects with wrong capital costs will harm the value of their bondholders and operating performance.