Inflation and Corporate Credit Risk: Global Evidence

Buhui Qiu, Thomas To, and Gaiyan Zhang

♦ We provide novel international evidence that inflation is positively associated with corporate credit risk on average. A one-standard-deviation increase in inflation is associated with a 21-basis-point increase in next-year CDS spreads. Importantly, this relationship is convex: it is negative or weak at low inflation levels, but is much more positive in high-inflation environments. The positive relation between inflation and credit risk is stronger for firms with greater refinancing vulnerability and more rigid operating cash flows, and in countries with more inflation-responsive monetary regimes and weaker institutional environments. Our findings are consistent with opposing roles for debt rigidity and operating rigidity.

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