Inflexibility and Corporate Credit Spreads

Zhaofeng Xu; Zhe An; Abe de Jong; Ying Xia

doi:10.1093/rcfs/cfaf009

Inflexibility and Corporate Credit Spreads

Zhaofeng Xu¹; Zhe An²; Abe de Jong³; Ying Xia²

¹ School of Business, Monash University MalaysiaMonash Business School, Monash University · ² Monash Business School, Monash University , · ³ Faculty of Economics and Business, University of GroningenMonash Business School, Monash University

The Review of Corporate Finance Studies 2025 open access

Abstract This paper studies the role of scale inflexibility in explaining corporate credit spreads. We find robust evidence that firms with higher inflexibility have higher credit spreads. To mitigate the endogeneity concern, we employ a regression discontinuity design that uses the exogenous variations in labor adjustment costs resulting from close-call union elections. Furthermore, contraction inflexibility is more prominent in influencing credit spreads than expansion inflexibility is. Additionally, inflexibility increases credit spreads due to increased cash flow volatility and financial distress risk. Our findings highlight the importance of a firm’s ability to adapt to productivity shocks in fulfilling its debt obligations. (JEL G12, G30, G32)

DOI: 10.1093/rcfs/cfaf009
Language: en
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