Strategic Actions and Credit Spreads: An Empirical Investigation




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    • Sergei Davydenko is at Joseph L. Rotman School of Management, University of Toronto. Ilya Strebulaev is at the Graduate School of Business, Stanford University. This paper was written while both authors were in the doctoral program at London Business School. We thank Ian Cooper, Stephen Schaefer, Viral Acharya, Anat Admati, Dick Brealey, Mark Carey, Francesca Cornelli, Craig Doidge, Julian Franks, Francisco Gomes, Steve Grenadier, Denis Gromb, Jean Helwege, Jan Mahrt-Smith, Pierre Mella-Barral, Stefan Nagel, Kjell Nyborg, Joel Reneby, Henri Servaes, Robert Stambaugh (the editor), Raman Uppal, an anonymous referee, and seminar participants at Bologna University, London Business School, Verona University, the American Finance Association 2004 San Diego meetings, and the European Finance Association 2003 Glasgow meetings for helpful comments and suggestions.


Do strategic actions of borrowers and lenders affect corporate debt values? We find higher bond spreads for firms that can renegotiate debt contracts relatively easily. Consistent with theories of strategic debt service, the threat of strategic default depresses bond values ex ante, even though there may be efficiency gains from renegotiation ex post. However, the economic significance of the net effect is small, suggesting that bondholders have considerable bargaining power. The effect of strategic actions is higher when creditors are particularly vulnerable to strategic threats, including risky firms with high managerial shareholding, simple debt structures, and high liquidation costs.