Publications
Publications
- 2012
- HBS Working Paper Series
Issuer Quality and Corporate Bond Returns
By: Robin Greenwood and Samuel G. Hanson
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 the 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.
Keywords
Price; Credit; Risk and Uncertainty; Investment Return; Forecasting and Prediction; Bonds; Market Design; Cost of Capital; Mathematical Methods; System Shocks
Citation
Greenwood, Robin, and Samuel G. Hanson. "Issuer Quality and Corporate Bond Returns." Harvard Business School Working Paper, No. 11-065, January 2011. (Revised September 2012, Internet Appendix Here.)
About The Authors
