Internal liquidity risk in corporate bond yield spreads

The recent global financial crisis reveals the important role of internal liquidity risk in corporate credit risk. However, few existing studies investigate its effects on bond yield spreads. Panel data for the period from year 1993 through 2008 show that corporate internal liquidity risk significantly impacts bond yield spreads (and changes) when controlling for well-known bond yield determinant variables, traditional accounting measures of corporate debt servicing ability, cash flow volatility, credit ratings, and state variables. This finding indicates that internal liquidity risk should therefore be incorporated into bond yield spread modeling.     

Information uncertainty,information asymmetry and corporate bond yield spreads

This study examines the effects of information uncertainty and information asymmetry on corporate bond yield spreads using American data from 2001 to 2006. Empirical results of this study show that investors charge a significant risk premium for both information uncertainty and information asymmetry when controlling for variables well known in the literature. The results are robust even when controlling for credit ratings. Finally, information uncertainty and asymmetry help structural-form credit models explain the yield spreads of bonds with short maturities.     

CEO ability heterogeneity,board’s recruiting ability and credit risk

This study investigates the effects of the CEO (Chief Executive Officer) ability heterogeneity of an industry and the board’s recruiting capability on firm credit risk by using 26,235 America bond data from the year 2001 to 2014. We find that both CEO ability heterogeneity and board’s recruiting ability enhance a firm’s credit quality when controlling for other well-known determinants of bond yield spreads, implying that high CEO ability heterogeneity and good board’s recruiting ability both encourage a firm to replace the underperformed CEO earlier and improve the firm’s subsequent performance, which enhances firm value and credit quality (Merton in J Finance 29(2):449–470, 1974). We also find that good macroeconomic conditions weaken the effect of CEO ability heterogeneity on bond yield spreads while enhance that of board’s recruiting ability. Moreover, board’s recruiting ability weakens the effect of CEO ability heterogeneity on bond yield spreads, indicating that there may exist a trade-off relationship between the CEO ability heterogeneity effect and the board’s recruiting ability effect. Finally, the results are robust when considering endogeneity issues and other measures of CEO ability heterogeneity.     

Suppliers’/customers’ production efficiency uncertainty and firm credit risk

This study explores the effects of business counterparties’ (i.e. suppliers’/customers’) production efficiency uncertainty (PEU) on corporate credit risk by employing American bond observations of manufacturing firms. Empirical results of this study show that customers’ PEU is positively related to corporate bond yield spreads whereas suppliers’ has an opposite effect. The former result shows the importance of demand uncertainty while the latter one suggests that the benefits of supply chain integration or information sharing exceed the costs of supply chain uncertainty. We also find that the effects of suppliers’/customers’ PEUs on bond yield spreads are significantly affected by the information flow risk within the supply chain. In addition, the customer-side effect becomes weaker during the financial crisis period, whereas the supplier-side one is insignificantly affected. These empirical results are robust when controlling for potential endogeneity problems and employing an alternative sample which consists of the bond observations with both supplier and customer identification information. Finally, it has to be noticed that our conclusions are only applicable to manufacturing industries.     

Macroeconomic risks of supply chain counterparties and corporate bond yield spreads

The domino phenomenon that corporate failures occur along supply chain during the recent financial tsunami shows the important effects of the systematic risk of a firm’s supply chain counterparties on its credit risk (or bond yield spreads). It motivates this research to investigate the effects of supply chain counterparties’ macroeconomic risks on corporate bond yield spreads by employing 10,022 American bond observations from 1997 to 2008. The empirical results show that the macroeconomic risks of a firm and its customers are significantly and positively related to the firm’s bond yield spreads while those of suppliers have insignificant effects.     

Internal liquidity risk,financial bullwhip effects,and corporate bond yield spreads: Supply chain perspectives

This study explores internal liquidity risk (ILR) and financial bullwhip effects on corporate bond yield spreads along supply chain counterparties by employing American market data from year 1997 to 2008. This study finds that the ILRs of suppliers and customers positively affect a firm’s bond yield spreads and the effects of customers’ ILRs are greater. This research also finds a financial bullwhip effect that the ILR effect becomes greater upwardly along the supply chain counterparties. The results are robust when controlling for well-known spread determinant variables.     

Suppliers’ and customers’ information asymmetry and corporate bond yield spreads

This study investigates the information asymmetry effects of suppliers and customers on a firm’s bond yield spreads by employing American bond market data from 2001 to 2008. This study finds that both suppliers’ and customers’ information asymmetry effects significantly explain a firm’s bond yield spreads. Besides, the information asymmetry effects of more important suppliers and customers are more significant than those of less important ones. The results are robust even after controlling for other well-known firm specific and economic variables.     

The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

This article investigates the impact of corporate diversification on credit risk. To our best knowledge, this is the first paper to use credit default swap (CDS) spreads instead of bond yield or revalued book values to test the risk‐reduction hypothesis. The analysis relies upon a sample of STOXX^® EUROPE 600 index members and covers the years 2010–2014. After controlling for various CDS‐ and firm‐specific variables, we find that diversification strategies do not significantly lower CDS premiums. Multilevel mediation analysis further shows that information asymmetries overcompensate the risk‐reducing effects resulting from corporate diversification.     

Determinants of yield spread dynamics: Euro versus US dollar corporate bonds

This paper presents a systematic comparison between the determinants of euro and US dollar yield spread dynamics. The results show that US dollar yield spreads are significantly more affected by changes in the level and the slope of the default-free term structure and the stock market return and volatility. Surprisingly, euro yield spreads are strongly affected by the US (and not the euro) level and slope. This confirms the dominance of US interest rates in the corporate bond markets. Interestingly, I find that liquidity risk is higher for US dollar corporate bonds than euro corporate bonds. For both regions, the effect of changes in the bid-ask spread is mainly significant during periods of high liquidity risk. Finally, the results indicate that the credit cycle as measured by the region-specific default probability significantly increases US yield spreads. This is not the case for euro yield spreads.     

Longitudinal accounting comparability and bond credit spreads: Evidence from China

This paper proposes a procedure to measure firms’ longitudinal accounting comparability and investigates whether it affects bond risk premiums. The results provide robust evidence that bonds of firms with more longitudinally comparable accounting information have lower credit spreads. This effect is stronger when the firms’ financial performance is poor and for bonds with speculative credit ratings. Results also reveal that firms with less longitudinally comparable accounting information are more informationally asymmetric and do have a higher expected default probability. Finally, the effects of the longitudinal and the cross-sectional comparability in reducing bond credit spreads are incremental to each other.     

Corporate yield spreads and real interest rates

The effect of inflation on the credit spreads of corporate bonds is investigated utilising real instead of nominal interest rates in extensions of the models proposed by Longstaff and Schwartz (1995) and Collin-Dufresne et al. (2001). Inflation is a critical, non-default, component incorporated in nominal bond yields, whose effect has not been considered by existing credit spread theory. In this sense the only true test of models of credit spread pricing must utilise real rates. To illustrate these requirements the Canadian bond data of Jacoby, Liao, and Batten (2009) is utilised. This Canadian data accommodates callability and the tax effects otherwise present in U.S. bond markets. The relation with historical default rates of both U.S. and Canadian bonds is also investigated since this approach is clean of both callability and tax effects. Overall, the analysis provides additional insights into the theoretical drivers of credit spreads as well as helping to explain observed corporate bond yield behaviour in financial markets.     

Testing for a break in the persistence in yield spreads of EMU government bonds

This study tests for a break in the persistence of EMU government bond yield spreads examining data from France, Italy and Spain and using German interest rates as a kind of benchmark. The results reported here provide evidence for breaks between 2006 and 2008. The persistence of the yield spreads against German government bonds has increased significantly after this period. This could be a sign of higher sovereign credit risk (and possibly even redenomination risk) caused by the debt crisis in the euro area. We find clear indications for non-stationary behavior after the breakpoints and empirical evidence for positive excess kurtosis and GARCH-effects when persistence increases.     

Local religious beliefs and municipal bond market outcomes

This study investigates whether religion-induced risk aversion affects municipal bond market outcomes from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with a high Catholic-to-Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits, and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Furthermore, the effects persist when I use an alternate specification that controls for omitted factors that are time invariant. Overall, my evidence suggests that a bond issuer's religion-induced risk aversion plays a significant role in the pricing of local government bonds.     

Do significant risk warnings in annual reports increase corporate bond credit spreads? Evidence from China

Based on listed companies issuing bonds on the Shanghai and Shenzhen Stock Exchanges from 2007 to 2017, this study analyzes the relationship between significant risk warnings in Chinese companies’ annual reports and corporate bond credit spreads. The main findings are as follows. First, in the Chinese market, “substantial warnings of significant risks” can significantly improve corporate bond credit spreads, reflecting the risk-warning effect; second, state-owned property rights weaken this effect, which only pertains to listed companies with poor risk management and low information quality; third, significant risk warnings increase investors’ heterogeneous beliefs, also affecting credit spreads; and fourth, through textual analysis, it is found that the corporate bond credit spread is greater when the disclosed risk factors are more pessimistic and less similar to those of the previous year. The findings of this paper help to enrich the literature on credit spreads and risk disclosure.     

CORPORATE BONDS AND PRODUCT MARKET COMPETITION

I examine the effect of product market competition on the yield spread of corporate bonds. I find that firms that face more competitive threats also face a higher cost of corporate bond debt. After controlling for common bond-level, firm-level, and macroeconomic variables, my results show that bondholders of firms that are subject to increased competition demand significantly higher credit spreads than holders of otherwise similar bonds. Furthermore, this effect is more pronounced for firms that have assets that are difficult to redeploy. Overall, my findings provide evidence that competitive threats are being reflected in corporate debt prices.     

“一带一路”倡议与公司债信用利差

本文以中国“一带一路”倡议的出台作为准自然实验,采用双重差分法考察国家倡议对微观企业债券信用利差的影响。研究发现:(1)相对于非支持企业,“一带一路”倡议实施能够显著降低支持企业的公司债二级市场信用利差,该结论在一系列稳健性检验之后仍然成立。(2)通过考察“一带一路”倡议的债券市场反应,我们发现相比于非支持企业,支持企业在倡议提出后有显著更高的债券累计超额回报率。(3)进一步检验后发现,“一带一路”倡议对公司债二级市场信用利差的降低作用主要通过资源效应和信息效应来实现。并且,政策影响范围主要集中在重点对接行业以及重点对接省份的企业。(4)“一带一路”倡议还对公司债一级市场的发行表现产生影响。具体表现为:在倡议实施之后,受倡议支持企业发行的公司债,其一级市场发行利差下降幅度更大,且包含的担保条款以及限制性契约条款显著更少。本研究探讨了“一带一路”倡议对公司债券市场的政策效应,对未来推进“一带一路”建设,提高资金融通效率具有参考意义。     

Recognition versus disclosure of finance leases: Evidence from Japan

This study examines whether credit market participants—bond investors and credit rating agencies—treat recognized and disclosed finance leases differently when assessing firms’ credit risk in Japan. I use firms’ credit risk, measured by bond spreads and credit ratings, to investigate the relations between recognized versus disclosed finance lease obligations and firms’ credit risk following the adoption of Statement No. 13, Accounting Standard for Lease Transactions. For a sample of firms issuing new bonds, I find that, unlike recognized finance leases, disclosed finance leases are not associated with bond spreads. Moreover, the associations between recognized versus disclosed finance leases and bond spreads are substantially different. Conversely, recognized and disclosed finance leases are associated with credit ratings and are processed similarly when credit ratings are determined. Taken together, my results suggest that the sophistication of capital market participants influences their credit risk assessments of recognized versus disclosed finance leases.     

The cost of private debt over the credit cycle

We identify global and regional fluctuations in international private debt flows to emerging and developing countries using data on cross-border loans and international bond issuance over 1993–2009. We use micro-level data on syndicated cross-border loans and international bond placements to estimate the effects of individual borrower characteristics as well as macroeconomic conditions on the cost of foreign borrowing and test whether these effects differ across phases of the lending cycle. First, we find that borrower characteristics associated with lower loan spreads are not necessarily associated with lower bond spreads. Second, we find differential effects of borrower characteristics between cycle phases for loans and bonds separately. Third, we find strong reductions in the cost of debt finance during periods when international debt flows are more than one standard deviation above their mean, but not for expansionary periods, when the growth rate of debt flows is increasing. We also find that higher trade ratios in the borrower's home country raise loan spreads more in periods of high credit flows but have no effect on bond spreads. At the same time, borrowers residing in countries with high investment ratios pay lower spreads on bond issuance particularly during periods of high credit flows, but we find no similar effect for loan spreads. Inflation rates, real exchange rates and previous banking crises have small impacts on loan and bond spreads.     

Corporate bond credit spreads and forecast dispersion

Recent research establishes a negative relation between stock returns and dispersion of analysts’ earnings forecasts, arguing that asset prices more reflect the views of optimistic investors because of short-sale constraints in equity markets. In this article, we examine whether a similar effect prevails in corporate bond markets. After controlling for common bond-level, firm-level, and macroeconomic variables, we find evidence that bonds of firms with higher dispersion demand significantly higher credit spreads than otherwise similar bonds and that changes in dispersion reliably predict changes in credit spreads. This evidence suggests a limited role of short-sale constraints in our corporate bond data sets. Consistent with a rational explanation, dispersion appears to proxy largely for future cash flow uncertainty in corporate bond markets.     

The effectiveness of the ECB’s unconventional monetary policy: Comparative evidence from crisis and non-crisis Euro-area countries

During the European financial crisis, the European Central Bank implemented a series of unconventional monetary policy measures. We argue that these programs lowered the bond yield spreads of Euro-area countries. This hypothesis is tested using pooled OLS estimations and two different datasets: monetary policy event dummies and the purchase volumes of the Securities Markets Programme (SMP). Overall, we find significantly negative effects on bond yield spreads for both datasets, leading us to accept the hypothesis. While the OMT reduces the spreads of both crisis and non-crisis countries, LTROs and the lowering of the deposit rate to 0 percent are mainly effective in non-crisis countries. The SMP lowers the spreads of crisis countries, but it has the opposite effect on non-crisis countries. This converse effect is explained by the risk that increasingly accumulates on the ECB’s balance sheet through the SMP and that way constitutes a fiscal risk for non-crisis countries. The results are confirmed by pooled OLS estimations that measure the effect of unconventional monetary policy on central government debt.