The Determinants of Recovery Rates on Defaulted Corporate Securities: Why do Fallen Angels recover more than Original High Yield Issues?
Date of Award
2007
Document Type
Honors Thesis (Open Access)
Department
Colby College. Economics Dept.
Advisor(s)
Randy A. Nelson
Second Advisor
Debra A. Barbezat
Abstract
Regression analysis has shown that recovery rates are determined by a variety of conditions at the time of default. These conditions can be broken into five major categories: (1) a security's seniority within the capital structure of the defaulting firm, (2) the type of default event, (3) firm-specific factors, (4) industry-specific factors, and (5) macroeconomic factors. Expectations of these inputs determine the expected recovery rate if default were to occur, thereby determining credit ratings and security prices. Although it is widely understood how recovery rate estimates influence credit rating assignments (the higher the expected recovery rate, the higher the assigned credit rating), no research, to the best of my knowledge, has investigated the reasons why higher rated securities recover more than lower rated securities in the event of default. Specifically, this paper will empirically investigate why securities originally rated investment grade, fallen angels, recover more than securities originally rated high yield in the event of default.
Keywords
Default (Finance), Securities -- United States, Corporations -- United States -- Finance, Investment banking -- United States
Recommended Citation
Adler, Carolyn, "The Determinants of Recovery Rates on Defaulted Corporate Securities: Why do Fallen Angels recover more than Original High Yield Issues?" (2007). Honors Theses. Paper 497.https://digitalcommons.colby.edu/honorstheses/497
Copyright
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