Credit Spreads and Investment Opportunities

46 Pages Posted: 15 Mar 2012 Last revised: 17 Nov 2015

Date Written: October 28, 2015

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.

Keywords: Q, investment, credit spreads

JEL Classification: G12, G30, E22

Suggested Citation

Shen, Tao, Credit Spreads and Investment Opportunities (October 28, 2015). Available at SSRN: https://ssrn.com/abstract=2022275 or http://dx.doi.org/10.2139/ssrn.2022275

Tao Shen (Contact Author)

Tsinghua University ( email )

Department of Finance
School of Economics and Management
China

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