Do hidden liabilities unravel the credit spread puzzle?

Abstract

This work is based on the so-called “Credit Spread Puzzle” phenomenon. It suggests a new way to deal with the phenomenon, namely, the consideration of hidden debt in specific firms’ balance sheets. This information serves as an input in assessing a firm’s credit risk and default probabilities. The work’s aim is to test, through known credit risk models, whether the modified input helps to bridge the gap between theoretical and observed credit prices and spreads and to determine the extent to which it does make a change.