Financial institution credit assessment and implications for portfolio managers

Lynnette Purda, Fatma Sonmez and Ligang Zhong

Journal of International Financial Markets, Institutions and Money, 2015, vol. 38, issue C, 148-166

Abstract: We document systematic industry differences between the yields of bonds issued with the same credit rating. Specifically, financial firm bonds provide higher yields after controlling for issue and firm-specific characteristics. An exception is the debt of large financial issuers, consistent with the too-big-to-fail phenomenon. Evidence of higher yields extends to syndicated loans but does not translate to abnormal returns in secondary bond market trading when returns are explained by a four factor model. Our results suggest that portfolio managers could use financial institution bonds to generate greater yield within their rating constraints but doing so may increase exposure to risk.

Keywords: Financial institutions; Credit ratings; Reach for yield (search for similar items in EconPapers)
JEL-codes: G12 G20 G33 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:38:y:2015:i:c:p:148-166

DOI: 10.1016/j.intfin.2015.05.018

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