Title: The Effects of the Components of Leverage Ratio on CDS Spreads
This Friday, 17th May, at 12.00 in the Alfa seminar room, Mehmet Caglar Kaya will present his paper “The Effects of the Components of Leverage Ratio on CDS Spreads” in the Finance Brown Bag.
Abstract: This study aims to examine in detail the most common determinant of credit risk, the leverage ratio, proposed both by theoretical structural risk models relying on market information and credit risk models depending on accounting data. Distinct from previous works, this study is the first one which investigates how different types of debt affect corporate CDS spreads. We decompose leverage ratio into its components: market debt, bank debt, trade credit leverage ratios by account type classification, short-term debt, and long-term debt leverage ratios by debt maturity classification. The results suggest that debt to financial markets (commercial papers, bonds, etc.) influences positively the next period's CDS spread more than other debt types. CDS spread also reacts positively to bank debt leverage, whereas not to trade credit leverage. However, we document that CDS market keeps an eye on trade receivable of firms. Overall, our findings are also robust when we control for the credit quality of firms with credit ratings.
Sandwiches will be provided.