Issuer Quality and Corporate Bond Returns
Year: 2013
Type: article
Abstract: We show that the credit quality of corporate debt issuers deteriorates during credit booms and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low-quality firms, so debt issuance of low-quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time variation in expected corporate bond returns.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hht016
Authors: Robin Greenwood, Samuel G. Hanson
Institution: Harvard University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2135714352