Asset Dividend Yield Skew Implied in Corporate Credit Spreads

Given that asset volatility skew expresses several levels of business risk according to the leverage used, the goal of this paper is to prove the relevance of dividend policy (skew effect) in the credit spreads of a company. In a simple analysis framework, this work highlights significant implications for the analysis of some recent market phenomena: Dividend Aristocrats (DA), the Low Volatility Anomaly (LVA) and the Credit Spread Puzzle (CSP). Whilst the DA classifies high dividend yield (and also, oddly, high asset volatility) companies in the S&P500, the LVA highlight the fact that low-risk firms generate a better performance with respect to high-risk firms, contrary to the CAPM (Capital Asset Pricing Model). The CSP refers to the structural model’s inability (and not only) to explain empirical credit spreads fully, in particular for investment grade issuers. The evidence that these latter companies are highly profitable (‘Dividend Aristocrats’) seems to confirm the Pecking Order Theory. In addition, for investment grade companies a slight increase in leverage implies higher received benefits in terms of the risk-return combination, thus also supporting the Trade-off Theory.