The term structure of credit spreads, firm fundamentals, and expected stock returns

Bing Han, Avanidhar Subrahmanyam and Yi Zhou

Journal of Financial Economics, 2017, vol. 124, issue 1, 147-171

Abstract: We explore the link between credit and equity markets by considering the informational content of the term structure of credit spreads. A shallower credit term structure predicts decreases in default risk and increases in future profitability, as well as favorable earnings surprises. Further, the slope of the credit term structure negatively predicts future stock returns. While systematic slope risk is priced, information diffusion from the credit market to equities, particularly in less visible stocks, plays an additional role in accounting for return predictability from credit slopes. That is, such predictability is less evident in stocks with high institutional ownership, analyst coverage, and liquidity, and vice versa.

Keywords: Cross section of stock return; Credit default spreads; Term structure; Information diffusion (search for similar items in EconPapers)
JEL-codes: G02 G12 G13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:124:y:2017:i:1:p:147-171

DOI: 10.1016/j.jfineco.2017.01.002

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