chapter  21
14 Pages

■ The Correlation of a Firm’s Credit Spread with Its Stock Price: Evidence from Credit Default Swaps

This chapter conducts an empirical analysis of the linkages between the equity and corporate debt markets. These are the two markets that firms use for raising capital. So far, there is little empirical evidence on linkages between the two markets. In the model of Merton (1974), corporate debt and equity represent alternative claims on a firm’s assets. The two securities’ common dependence on the firm asset value may create measurable linkages between the market prices of a firm’s stock and its corporate bonds.