Investment Opportunities and Corporate Credit Risk

Using a panel dataset for international corporate bonds, this paper explores the relationship between investment opportunities and corporate credit risk. Consistent with theoretical arguments that investment opportunities reduce a firm’s likelihood of bankruptcy, this study shows that corporate credit spreads are negatively related to proxies for investment opportunities, even after controlling for the standard determinants of credit risk. This result is stronger for bonds maturing in the short and medium term. This paper also presents evidence that credit spreads and investment opportunities are linked through a credit-rating channel. JEL CODE: F3, F4, G1, G2, G3. Key words: KEY WORDS: Bankruptcy; Credit ratings; Credit spreads; Default risk; Investment opportunities