Production efficiency uncertainty and corporate credit risk: Structural form credit model perspectives

Abstract

Abstract This study investigates the effect of production efficiency uncertainty (PEU) on firm credit risk from structural form credit model perspectives (e.g. asset volatility) by employing 4376 American manufacturing firms' bond observations from the year 1997 to 2008. We find that PEU is positively related to firm credit risk when controlling for well-known credit risk determinant variables. We also find that booming economic conditions weaken the PEU effect. Finally, our empirical results are robust for the firm-fixed effect issue and the minimum required observations in estimating production efficiency.