Accounting data and the credit spread: An empirical investigation

Amer Demirovic, Jon Tucker, Cherif Guermat

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)
58 Downloads (Pure)


Measures of credit risk based on Merton (1974) rely upon information available in the market prices of securities. Under the Efficient Market Hypothesis market prices should reflect all available information and, hence, make redundant all other information in the analysis of credit risk. This paper examines whether accounting data are fully reflected in the market-based measures of credit risk and therefore has no role in explaining variations in the credit spread on corporate bonds. We use a sample consisting of over 11,000 firm-quarter observations with matched equity, bond and accounting data. The results suggest that equity volatility and Merton's distance-to-default outperform accounting variables in explaining variations in the credit spread. However, accounting variables are incrementally informative in explaining variations in the credit spread when considered in conjunction with market-based measures. Within the set of accounting variables considered, we find that the profitability ratio is by far the most incrementally informative accounting variable.

Original languageEnglish
Pages (from-to)233-250
Number of pages18
JournalResearch in International Business and Finance
Early online date12 Feb 2015
Publication statusPublished - 1 May 2015
Externally publishedYes

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in Research in International Business and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Research in International Business and Finance,VOL 34, (2015) DOI: 10.1016/j.ribaf.2015.02.013

© 2017, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International


  • Accounting data
  • Credit risk analysis
  • Credit spread
  • Distance-to-default
  • Value relevance

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Finance


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