Marking to Market Corporate Debt

Lorenzo Bretscher, Peter Feldhütter, Andrew Kane, Lukas Schmidt

Research output: Contribution to conferencePaperResearchpeer-review


Models of capital structure and credit risk make predictions about market valuations of debt, but are routinely tested on the basis of book debt from common data sources. In this paper, we propose to close this gap. We construct a rich data set on firm level debt market valuations by carefully matching data on corporate bond and loan secondary market transactions. We document significant discrepancies between market and book values, especially for distressed firms. We use our dataset to i) provide novel rules of thumb on how to adjust leverage and unlever returns using standard datasets, and ii) to revisit a number of prominent empirical patterns involving corporate debt. Using a market-based measure of Tobin’s Q, we find little evidence for investment cash-flow sensitivity in our data. We find that using market debt values significantly improves default prediction, and do not detect a credit spread puzzle. In asset pricing tests, we find a leverage premium, but no evidence for a value premium
after controlling for market leverage. Moreover, a novel measure of financial distress, namely market-to-book debt, predicts stock returns positively in the cross-section, inconsistent with a financial distress puzzle.
Original languageEnglish
Publication date2021
Number of pages84
Publication statusPublished - 2021
EventChina International Conference in Finance 2021 - Online and Onsite, Shanghai, China
Duration: 6 Jul 20219 Jul 2021


ConferenceChina International Conference in Finance 2021
LocationOnline and Onsite
Internet address

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