Abstract
This paper theoretically and empirically studies the relation between credit news uncertainty and corporate bond returns. Our model states that when the quality of credit news is uncertain, bond prices respond more to bad news than to good news, ambiguous news about default likelihood increases premiums for holding corporate bonds, and dispersion in credit ratings is a proxy for uncertainty in credit news. Empirical results support the model, including asymmetric price reactions to good and bad news, and significantly positive return predictions by our credit news ambiguity measure. The findings are robust to various specifications.
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