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Derivation of Corporate Debt Pricing Model and Its Empirical Implications

Title
Derivation of Corporate Debt Pricing Model and Its Empirical Implications
Authors
Kang, WonShin, Jungsoon
Ewha Authors
신정순
SCOPUS Author ID
신정순scopus
Issue Date
2016
Journal Title
ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES
ISSN
2041-9945JCR Link2041-6156JCR Link
Citation
vol. 45, no. 3, pp. 439 - 462
Keywords
Corporate debt pricing modelModigliani and MillerCapital asset pricing model
Publisher
WILEY-BLACKWELL
Indexed
SSCI; SCOPUS; KCI WOS scopus
Abstract
One of the reasons the empirical capital asset pricing model (CAPM) fails to confirm the theory is because historical returns on stocks are used. On the other hand, the bond returns observed at the time of issuance are expected returns. We combine the empirical CAPM with the Modigliani-Miller propositions adjusted for risky debts, and propose a corporate debt pricing model (CDPM) which is the flipside of the empirical CAPM. The model shows that the systematic risk of defaultable corporate debt can be measured by the covariance between the returns on debt and equity market index. Using individual firm data, we test three versions of CDPM. All validate the positive relationship between individual deltas and returns with full or partial samples. Since CDPM is directly derived from CAPM, the results prove that CAPM can be validated even with individual firm data if proper expected returns are used in the test.
DOI
10.1111/ajfs.12135
Appears in Collections:
경영대학 > 경영학전공 > Journal papers
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