Cash flow volatility and corporate bond yield spreads

Alan Douglas (), Alan Huang () and Kenneth Vetzal ()

Review of Quantitative Finance and Accounting, 2016, vol. 46, issue 2, 417-458

Abstract: We conduct a detailed empirical study of the effects of cash flow volatility on corporate bond yield spreads. We use both forward-looking and historical cash flow volatility measures. Using a large sample of transaction prices for investment grade straight bonds, we show that cash flow risk has strong statistical significance and economic effects on spreads, after controlling for a battery of factors which are known to be important determinants of spreads. The effects of cash flow risk are more pronounced for firms that are at greater risk of default, and when cash flow risk is measured based on more recent information. Our results provide empirical support to structural models of bond pricing and emphasize the effect of fundamentals-related information uncertainty on bond prices. Copyright Springer Science+Business Media New York 2016

Keywords: Corporate bond yield spreads; Cash flow volatility; Equity return volatility; Information recency; G11; G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (12)

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DOI: 10.1007/s11156-014-0474-0

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