Faculty Publications

Equity Misvaluation and Debt Markets

Document Type

Article

Keywords

Cost of debt, Credit rating, Credit risk, Debt markets, Misvaluation, Overvaluation

Journal/Book/Conference Title

Global Finance Journal

Volume

58

Abstract

This study examines whether equity misvaluation is associated with credit risk. Credit risk can be argued as not being associated with equity misvaluation because equity misvaluation is noisy information relative to a borrower's intrinsic value. Instead, we hypothesize a nonlinear relationship between credit risk and firm misvaluation. We examine new bond issues between 1990 and 2018. Our results show that equity valuations higher than the intrinsic value are negatively associated with credit risk through higher credit ratings, lower bond yields, and a lower distance to default until analysts and creditors perceive that the firm becomes excessively overvalued. After that turning point, the association flips, and firm equity valuations become positively associated with credit risk.

Department

Department of Accounting

Original Publication Date

11-1-2023

DOI of published version

10.1016/j.gfj.2023.100902

Link to Full Text

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