Issuer Quality and Corporate Bond Returns

Robin Greenwood and Samuel Hanson

The Review of Financial Studies, 2013, vol. 26, issue 6, 1483-1525

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. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2013
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Working Paper: Issuer Quality and Corporate Bond Returns (2010)
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