The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis

Abstract

This Study explores the determinants of corporate bond spreads in emerging markets economics. Using a largely unexploited data set, the paper finds that corporate bond spreads are determined by firm-specific variables, bond characteristics, macroeconomic conditions, country-specific sovereign risk, and global factors. A variance decomposition analysis shows that firm-level performance indicators account for the larger share of the variance. In addition, the paper finds that corporate spreads respond more acutely to sovereign and global risk increases rather than to decreases. This Suggests two asymmetries prevalent in the data. The first is in line with the sovereign ceiling 'lite' hypothesis, which states that it appears from spreads data that sovereign risk remains a significant determinant of corporate risk although credit rating agencies have gradually moved away from a policy of never rating a corporate above the sovereign. The second is consistent with the popular notion that parties are common in emerging markets where investors are less informed and more prone to herding. Copyright (C) 2009 John Wiley & Sons, Ltd.