Abstract
This study examines the association between bond betas and default risk factors. We find that both long-term debt and the relative ratio of long-term debt to short-term debt increase the bond beta; two measures of profitability, net income/total assets and EBIT/total assets and a cash flow measure of cash flow from operations/total assets decrease the bond beta. A proxy measure of standard deviation of returns is also significantly negatively related to bond betas, confirming the prediction from the option pricing model. In addition, by using new cash flow measures in the discriminant analysis, we improve on the successful prediction rate of bond ratings.
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