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Credit risk, valuation and fundamental analysis

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  • Realdon, Marco

Abstract

This study explores how a firm's credit risk affects accounting based valuation of the firm, of its equity and of its debt. The valuation model integrates fundamental equity and credit analysis and, under appropriate conditions, abides by the value conservation principle even in the presence of credit risk. The term structures of credit spreads on corporate bonds and credit default swaps are linked to equity valuation and to pro-forma financial statements. Calibration of the valuation model to equity and credit market prices is feasible. The model explains how credit risk depresses price to earnings and price to book ratios.

Suggested Citation

  • Realdon, Marco, 2013. "Credit risk, valuation and fundamental analysis," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 77-90.
    • Handle: RePEc:eee:finana:v:27:y:2013:i:c:p:77-90
    DOI: 10.1016/j.irfa.2012.10.001
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    References listed on IDEAS

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    2. Jory, Surendranath R. & Ngo, Thanh N. & Wang, Daphne, 2016. "Credit ratings and the premiums paid in mergers and acquisitions," Journal of Empirical Finance, Elsevier, vol. 39(PA), pages 93-104.

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    More about this item

    Keywords

    Accounting based valuation; Credit spreads; Corporate bond valuation; Equity valuation; Default probability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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