De Facto Seniority, Credit Risk, and Corporate Bond Prices

Jack Bao and Kewei Hou

The Review of Financial Studies, 2017, vol. 30, issue 11, 4038-4080

Abstract: We study the effect of a bond’s place in its issuer’s maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers’ maturity structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evidence that these later bonds have larger yield spreads and greater comovement with equity and that the magnitude of the effects is consistent with model predictions for investment-grade bonds. Our results highlight the importance of bond-specific credit risk for understanding corporate bond prices. Received January 1, 2016; editorial decision June 6, 2017 by Editor Robin Greenwood.

JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (14)

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