De Facto Seniority, Credit Risk, and Corporate Bond Prices

Jack Bao and Kewei Hou
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Jack Bao: Federal Reserve Board
Kewei Hou: Ohio State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We study the effect of a bond's place in its issuer's maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers' maturity structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evidence that these later bonds have larger yield spreads and greater comovement with equity and that the magnitude of the effects is consistent with model predictions for investment-grade bonds. Our results highlight the importance of bond-specific credit risk for understanding corporate bond prices.

JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2017-17

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