Stocks versus corporate bonds: A cross-sectional puzzle

Jeroen van Zundert and Joost Driessen

Journal of Banking & Finance, 2022, vol. 137, issue C

Abstract: We study the cross-sectional relation between stock and corporate bond markets. By correcting credit spreads of corporate bonds for expected default losses and by using equity-bond elasticities, we obtain a firm’s expected bond-implied stock return, which we then compare to its realized stock return. We find, surprisingly, a strong negative cross-sectional relation between these expected and realized stock returns. We show that this effect is not simply a restatement of the distress risk puzzle or other well-known anomalies in stock and corporate bond markets. This negative cross-sectional relation is strongest for high-risk firms and for liquid stocks.

Keywords: Cross-market relations; Corporate bond; Stock; Distress risk; Expected stock return (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:137:y:2022:i:c:s0378426622000474

DOI: 10.1016/j.jbankfin.2022.106447

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