Equity Misvaluation and Debt Markets
This study examines whether equity misvaluation is associated with credit risk. One could argue that credit risk is not associated with equity misvaluation because equity misvaluation is noisy information relative to the intrinsic value of a borrower. Instead, we hypothesize and find a nonlinear relationship between credit risk and firm misvaluation. We examine new bond issues between 1990 and 2018. Our results show that higher equity valuations relative to the intrinsic value are negatively associated with credit risk through higher credit ratings, lower bond yields, and a lower distance to default to a point where analysts and creditors perceive that the firm is overvalued. However, after that turning point, the association flips, and firm equity valuations become positively associated with credit risk
Year of publication: |
[2022]
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Authors: | Bao, May Xiaoyan ; Crabtree, Aaron ; Morris, Marc ; Wan, Huishan |
Publisher: |
[S.l.] : SSRN |
Saved in:
freely available
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