Do credit spreads reflect stationary leverage ratios?

Pierre Collin-Dufresne, Robert S. Goldstein

Research output: Contribution to journalArticlepeer-review

255 Scopus citations


Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean-reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low-leverage firms, and less sensitive to changes in firm value, both of which are more consistent with empirical findings than predictions of extant models. Further, the term structure of credit spreads can be upward sloping for speculative-grade debt, consistent with recent empirical findings.

Original languageEnglish (US)
Pages (from-to)1929-1957
Number of pages29
JournalJournal of Finance
Issue number5
StatePublished - Oct 2001


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