Disruption drives credit risk - focus on abnormal financings and innovation

 

Disruption has a large impact on the risk for credit defaults.  Of course, the balance sheet and leverage matter but a new study shows that disruption as measured by abnormally high venture capital and IPO activity sees higher default rate. Innovation and strategy meet the credit markets. New entrants and innovations impact the likelihood that firms will be able to pay their debts.  See "Disruption and Credit Markets" by Bo Becker and Victoria Ivashina. 

Disruption increases default risk regardless of age, valuation, or leverage. Very large firms which may be diversified, or low-levered firms that have an added cash cushion may avoid these higher risks, but if you are in an industry that is going through change, risks of default will be higher.

This work makes intuitive sense and is completely consistent with structural models of credit risk. If there is greater firm volatility from industry disruptions and uncertainty,  default risk will go up and the price of debt will increase. This may not be tradable in the short run, but it provides a framework for accounting for added uncertainty independent of the balance.