The Effect of Internal Liquidity on Corporate Bond Credit Spreads
Date Issued
2007
Date
2007
Author(s)
Tsai, Pei-Ling
DOI
en-US
Abstract
In the field of credit risk analysis, considerable empirical studies have been devoted to decomposing the determinants of credit spreads. However, most find that the explanatory power of theoretical models is rather limited, and that the discrepancy between observed credit spread and its theoretical value remains unexplained. This study aims at exploring the effect of corporate internal liquidity on bond credit spreads. Aside from static accounting ratios used in other literatures, we employ a cash flow based solvency risk variable to measure internal liquidity. We find that internal liquidity has significant impact on credit spreads indeed. Besides, the effect of internal liquidity still exists after controlling other important variables. This implies that internal liquidity reveals some supplementary information about corporate credit condition in addition to credit rating or other existing factors. Therefore, internal liquidity risk should be incorporated into the modeling of bond credit spreads. Furthermore, our empirical results suggest that internal liquidity may be a systematic risk factor which can capture market-wide credit spread change to a large extent.
Subjects
內部流動性
信用價差
償付風險
Internal liquidity
Credit spread
Solvency risk
Type
thesis
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