Term Structures of Credit Spreads with Incomplete Accounting Information

By Darrell Duffie, D. Lando. World Scientific Reference on Contingent Claims Analysis in Corporate Finance, 2001

481 citations recorded by the source corpus.

We study the implications of imperfect information for term structures of credit spreads on corporate bonds. We suppose that bond investors cannot observe the issuer's assets directly, and receive instead only periodic and imperfect accounting reports. For a setting in which the assets of the firm are a geometric Brownian motion until informed equityholders optimally liquidate, we derive the conditional distribution of the assets, given accounting data and survivorship. Contrary to the perfect-information case, there exists a default-arrival intensity process. That intensity is calculated in terms of the conditional distribution of assets. Credit yield spreads are characterized in terms of accounting information. Generalizations are provided.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/bae5acd003febdc7c9e1ff1b07e5723b28a55ca0

Citations in the corpus

• Bank Capital, Liquid Reserves, and Insolvency Risk (2017, unknown): “In the following, we use a stock based definition of default whereby the bank services debt as long as equity value is positive (as in e.g. Leland (1994), Duffie and Lando (2001), or Sundaresan and Wang (2014)).”