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Credit spreads and investment opportunities

Author

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  • Tao Shen

    (Tsinghua University)

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.

Suggested Citation

  • Tao Shen, 2017. "Credit spreads and investment opportunities," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 117-152, January.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:1:d:10.1007_s11156-015-0545-x
    DOI: 10.1007/s11156-015-0545-x
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    More about this item

    Keywords

    Tobin’s q; Investment; Credit spreads; Financial frictions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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