The q-factors and expected bond returns |
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Institution: | 1. Area Accounting & Taxation, University of Mannheim, 68131 Mannheim, Germany;2. German Graduate School of Management and Law, 74076 Heilbronn, Germany;1. Department of Accounting, College of Business, Soochow University, Taipei 100, Taiwan;2. Department of Finance, School of Management, Xiamen University, Xiamen 361005, China |
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Abstract: | This study provides new insight into the recent debate on profitability and investment patterns in the cross-section of expected returns. Relying on implied risk premia of U.S. corporate bonds, we document a strong negative relation between exposure to the profitability factor and cost of debt. We do not observe a robust relation between exposure to the investment factor and cost of debt. Our findings are consistent with profitability being a risk factor, but suggest that high profitability implies lower (and not higher) risk. Because the market portfolio consists of all risky assets including corporate bonds, our findings challenge a risk-based explanation for the profitability and investment patterns in stock returns. |
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