Bond Yield Spreads Research Articles

Which exogenous driver is informative in forecasting European carbon volatility: Bond, commodity, stock or uncertainty?

This study relies on 45 exogenous drivers to improve the accuracy in forecasting EUA volatility. Several popular linear and nonlinear predictive regressions, including individual factor analysis, the combination forecast method, the diffusion index model and the supervised learning method, are used to generate volatility forecasts at the monthly frequency. Our empirical results reveal that the diffusion index model and combination forecast method can hardly drive the EUA volatility in a data-rich world owing to worse forecasting performance of individual factors; however, the supervised learning method can successfully predict the EUA volatility. Additionally, the WilderHill new energy global innovation index, Euro corporate bond return spread, GSCI gold index and Euro Area government bond yield spread can extremely drive EUA volatility in terms of individual factor analysis, frequency of variable selection and factor importance. Our findings provide crucial implications to market participants and emission companies, who should pay more attention to the price movement of European bond market, gold and clean energy.

The Role of Social Media in the Corporate Bond Market: Evidence from Twitter

Prior studies document the role social media information plays in the stock market and the important dissimilarities between the bond and stock markets. Bridging these two types of literature, we examine the role of social media information in the corporate bond market. Analyzing a broad sample of messages by Twitter individual users, posted just prior to earnings announcements, containing bond, credit risk, and fundamental information, we find that aggregate Twitter opinion (OPI) predicts upcoming announcement bond returns and changes in credit default swap (CDS) spreads, and is associated with future changes in bond yield spreads and credit ratings, thereby providing economically important information to the bond market. This interpretation is bolstered by results from a variety of cross-sectional analyses. Finally, we document an association between OPI and future changes in default risk, which casts light on the nature of the Twitter information underlying our findings. Overall, our findings demonstrate that Twitter appears to disseminate potentially economically important information to even the presumably sophisticated bond and CDS investors, as well as information intermediaries. This paper was accepted by Suraj Srinivasan, accounting. Funding: P. Mohanram acknowledges financial support from the Social Sciences and Humanities Research Council (SSHRC) of Canada. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4589 .

Fund flow-induced volatility and the cost of debt

Uninformative stock price fluctuations induced by volatile mutual fund flows generate unintended consequences for corporate debt financing. We propose a measure of stock-level passive equity mutual fund flow-induced volatility pressure and find that it positively affects the bond yield spread at issuance through higher perceived risks revealed by increased equity volatility. Although flow-induced volatility is costly to the borrowing firm, in contrast to equity volatility, it has no significant association with future firm fundamental risk. Our study reveals a dark side of passive investing.

Pension plans’ funded status volatility and corporate credit risk

We investigate whether and how U.S. pension plans’ funded status volatility affects firm credit risk. We first show that a firm's funded status volatility is positively related to its bond yield spread. We then find that the adoption of SFAS No.158 (2006) requiring the recognition of pension funding status on the statement of financial position renders the pension plan information more value-relevant, thereby increasing the effect of funded status volatility on bond yield spread. Furthermore, the predictions that funded status volatility affects asset value volatility and incomplete accounting information, which in turn affects corporate credit risk, are empirically supported. Our findings reinforce the need for firms to disclose reliable information about funded status volatility—a major pension plan risk—to external investors.

Municipal Net Revenue, Economic Activity, and the Cost of Borrowing

ABSTRACT We investigate the effects of state economic activity on the association of changes in the general fund (i.e., net revenue) and borrowing cost. Extant literature has established that net revenue is associated with municipal bond market metrics (e.g., true interest cost, bond yield spreads). Little is known, however, regarding the relationship between net revenue and borrowing cost when state economic activity is considered. Based on a sample of 1,970 general obligations bonds issued across 20 years by U.S. counties, we test whether the association between net revenue and borrowing cost is conditioned on state economic activity. We provide evidence that a state's economic activity moderates the association between net revenue and borrowing cost among county governments. Data Availability: All data in this article are available from public sources. JEL Classifications: G01; G12; H72.

The Effect of Government Reference Bonds on Corporate Borrowing Costs: Evidence from a Natural Experiment

Government bonds might provide reference entities that reduce corporate bond yields. We study China’s 2017 issuance of two U.S. dollar (USD)-denominated sovereign bonds when there were (effectively) no outstanding USD sovereigns. We find that Chinese corporate USD bonds experienced a four- to nine-basis-point decline in yield spreads, whereas corporate renminbi (RMB) bonds did not. The effect was stronger for corporate bonds with maturities similar to those of the USD sovereigns. Further consistent with the reference effect, USD-denominated corporate bonds experienced declines in bid-ask spreads and volatility; corporate bond yield spread changes became more sensitive to sovereign yield innovations; and the less-informed foreign mutual funds significantly increased their holdings of offshore USD Chinese corporate bonds. Limited evidence indicates that new corporate bond maturities shifted toward the sovereign bonds’ maturity after their issuance.This paper was accepted by Lukas Schmid, finance.Funding: B. Wang received financial support from Hong Kong Institute for Monetary Research. C. Y. Hong received financial support from the National Natural Science Foundation of China [Grant 72003125].Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2022.4499 .

CEO Narcissism and Corporate Credit Risk

We investigate whether CEO narcissism affects a firm’s credit risk from bondholders' perspective. We find that CEO narcissism is significantly and positively related to corporate bond yield spread (namely credit risk), indicating that bondholders care more about the increase on asset value volatility and financial constraint than the increase on asset value due to the risk-taking behaviors conducted by a narcissistic CEO. The implications are empirically supported by the path analyses. In addition, better corporate governance quality (especially internal governance), higher management team background homogeneity, and lower likelihood of future growth weaken the positive effect of CEO narcissism on bond yield spread while higher management team shared working experience, cash conversion cycle, and R&D intensity all enhance the CEO narcissism effect. Moreover, we also find that bondholders have less concern about a narcissistic CEO when the CEO simultaneously has the personality traits of conscientiousness and openness. Finally, our findings are robust when considering endogeneity issues and controlling for several well-known CEO-, firm-, and bond-level characteristics.

COVID-19, lockdowns, and the municipal bond market

We study how investors in the US municipal bond market price the state lockdowns announced during the coronavirus (COVID) pandemic. To begin with, we examine the extent to which state-level COVID developments influence yield spreads of municipal bonds. We find that macro-level factors are the primary determinants of municipal bond spreads during the pandemic, but state-level COVID developments also matter at the margin. For instance, a doubling of new COVID cases in a state is associated with a 2% (1.4 basis points) increase in yield spreads of municipal bonds issued in that state. Accordingly, lockdowns may decrease municipal bond spreads by reducing COVID cases, but lockdowns may also increase them by reducing local economic activities. Overall, we find that yield spreads in both primary and secondary municipal bond markets increase by about 15% following lockdown announcements, suggesting that lockdown announcements increase the risk premiums investors require for holding municipal bonds.

The liquidity impact of Chinese green bonds spreads

Green bond is widely treated as one of the most crucial financial instruments for achieving carbon neutrality. While existing research is insufficient to provide an in-depth understanding of the liquidity impact of green bonds, it obstructs this emerging asset's promotion and investment. This paper expands the current periphery of research by centering on Chinese green bonds. After employing the portfolio-based and the entire sample regression approach, we evaluate nine potential proxies' performance to clarify liquidity measurement metrics. We document that issued amount, time to maturity, yield dispersion, the specific target of proceeds or not, and reputation of the underwriter are the five effective indicators. Consequently, the average Chinese green bond liquidity premium is estimated based on these proxies, 28.14 bps, occupying 16.92% of the whole green bond yield spreads. The results of time-varying liquidity premiums furtherly point out some significant findings of the current circumstance for developing the Chinese green bonds. By combining a matching process, we display the corresponding conventional bonds' liquidity impact with an average premium of 19.4 bps. Based on such differences between the two, we imply some unique features of green bonds.

Analysis of the Risk and Return of Bonds and Sukuk Listed on the Indonesia Stock Exchange

Abstract. Introduction. Financial market penetration in terms of both knowledge and accessibility has become more extensive and widespread as a result of economic globalization. This financial development was followed by an increase in funding demand on the financial market. Bonds and sukuk are two financial instruments that are very attractive to investors. Bonds are a type of debt activity agreement that is licensed through a debt certificate, whereas sukuk are certificates that have the same value and are evidence of ownership of a project or certain investment activities such as assets, benefit rights, and services. Purpose. This research aims to identify and analyze the risks and returns of corporate bonds and sukuk listed on the Indonesia Stock Exchange, as well as to determine whether ROA influences the yield spreads of bonds and corporate sukuk listed on the Indonesia Stock Exchange. Results. The research demonstrates that the return on corporate sukuk is greater than the return on corporate bonds, the risk of corporate sukuk is greater than the risk of corporate bonds, there is a significant difference in return between bonds and corporate sukuk, there is a significant difference in risk between bonds and corporate sukuk, and the Return on Assets (High ROA) significantly decreases yield spreads on corporate bonds and sukuk. Conclusions. The rate of return on corporate sukuk as calculated by Yield to Maturity (YTM) is greater than the rate of return on corporate bonds, while the level of risk of corporate sukuk as calculated by Value at Risk (VaR) is lower than the level of risk of corporate bonds. There is a significant difference in return when corporate sukuk and corporate bonds are measured by Yield To Maturity. High Value at Risk (VaR) and Return on Assets (ROA) indicate a large difference in risk between corporate sukuk and corporate bonds, which considerably reduces yield spreads on sukuk and corporate bonds.

Individual investment bankers’ reputation concerns and bond yield spreads: Evidence from China

Using a sample of domestic corporate bonds issued by Chinese firms, this study examines the relationship between the reputation concerns of individual investment bankers and bond yield spreads. China provides an unbiased method to capture individual investment bankers’ reputation concerns in terms of the initial public offering qualification. We find a robust negative relationship between bond offering yields and the reputation concerns of individual investment bankers who underwrite the bonds, indicating that reputation concerns motivate individual investment bankers to provide high-quality underwriting services and in turn enhance the market valuation of bonds. This relationship is more pronounced for bond issues that have higher default risk and greater information asymmetry, underwritten by less reputable investment banks and rated by less reputable credit rating agencies, and issued by firms located in regions with weaker institutional environments. This study sheds new light on the importance of individual investment bankers’ attributes, particularly reputation capital, in determining the quality of bond underwriting services.

How can SMEs signal their quality and growth orientation to the market? An analysis of the cost of Italian corporate mini‐bonds

AbstractWe examine how small and medium‐sized enterprises (SMEs) may signal their quality and growth orientation to the market and the effect on the cost of bond funding, which is often high for unlisted firms and SMEs mainly because of their information opacity and higher riskiness. The paper contributes to the growing European debate on market innovations aimed at facilitating funding for smaller and nonlisted firms, breaking from the prior main focus on the cost for large and listed companies of accessing liquid bond markets. We analyze 220 mini‐bonds listed in Italy between 2013 and 2017 to examine determinants of yield spreads. Our explanatory variables are size, age, and tangible assets—all indicators of the firm's information opacity—together with the issuer's growth opportunities, rating availability, and the presence of a guarantee. The findings suggest that tangible assets can ease the asymmetric information and associated monitoring costs for investors, thus reducing the bond yield spread. More significantly, the yield spread depends on the type of investment project financed: risky growth projects are associated with a higher cost of funding than other types of projects. Under such circumstances, the rating represents an informative instrument for the market in assessing issuers' growth orientation.

Does CEO's early life experience affect corporate bond yield spread? Evidence from China's great famine

Based on imprinting theory, this study investigates whether a CEO's childhood famine experience affects the credit spread of firms' newly issued corporate bonds. Using the Great Famine setting in China, we provide evidence that firms with famine-experienced CEOs have lower bond credit spreads than firms with CEOs who have not experienced the famine. The results were robust after considering various potential endogeneity issues. Cross-sectional analyses suggest that the negative relationship between CEOs' famine experience and credit spreads is more pronounced when firms have high operating risk, are non-SOEs, and when economic policy uncertainty is high. Our study provides new empirical evidence that executives' traumatic early life experiences significantly impact their firms from the perspective of the cost of debt financing.

Do multiple large shareholders affect corporate bond yield spreads? Evidence from China

We investigate the impact of multiple large shareholders on corporate bond yield spreads. We find that the presence of multiple large shareholders lowers bond yield spreads. In cross-sectional analysis, we find that the impact of multiple large shareholders on bond yield spreads only exists in subsamples with severe agency costs, high default risk, and poor information asymmetry, indicating that multiple large shareholders (MLS) reduce corporate bond yield spreads by disciplining the expropriation of controlling shareholders and lowering information asymmetry. Overall, our findings document a positive economic consequence of multiple large shareholders from the perspective of debt financing costs.

Does local gambling culture affect bond yield spread? Evidence from China

ABSTRACT We study the effect of gambling culture in the province where a firm is located on its bond yield spread. Our findings suggest that a high gambling culture translates into a high bond yield spread. In addition, the impact is more salient for firms with high operating volatility and increased default risk. Overall, the results are consistent with the notion that when firms are located in high gambling culture provinces, they are riskier, and thus bond investors ask for a high bond yield.

The role of ESG scoring and greenwashing risk in explaining the yields of green bonds: A conceptual framework and an econometric analysis

This article aims to investigate the factors that most influence the yields of public sector and corporate green bonds besides those conveyed by the conventional finance theory (e.g., rating, volatility, maturity). To accomplish that, we first develop a theoretical framework that postulates the negative relationship between the size of the underlying project financed by a green bond issuance, the use of the ESG metrics to quantify such impact, as well as the positive relationship between the risk of greenwashing practices by the issuer, and the yield to maturity of the green bond. We then provide an empirical validation of our conceptual framework by estimating multiple regression models applied to two distinct samples of public and corporate green bonds issued globally in the 2012–2020 period. The reliability of our results is confirmed by further exploring the effects of some key determinants on the yield spread of green versus comparable ordinary bonds of corporate issuers. Our findings corroborate our theoretical predictions showing that investors are inclined to accept lower returns in exchange for contributing to the funding of infrastructure projects with greater impact on the sustainability of target communities or territories and require higher premia as a form of compensation when being exposed to higher risk of greenwashing by issuers. At corporate level, greenwashing risk is higher among manufacturing (rather than services) firms but more pronounced in the financial sector. At public level, greenwashing strategies may be more easily pursued by multinational or sovereign issuers rather than local governments as the former's greater distance from communities enables them to elude investors' controls. Important recommendations are drawn for investors, rating agencies, and policymakers.

Прогнозирование спреда доходности на российском долговом рынке

The article provides an empirical study of factors which make a significant impact on the yield spread of corporate bonds on Russia’s market. Unlike most studies based only on IPO data, the current study covers primary and secondary markets data of 2010–2019. The aim of the study is to test the method allowing to build a model capable of predicting the yield spread with maximum approximation to actual value. The author develops a regression model applying a cross-validation method, a procedure for empirical assessment of the model generalizing ability. An important prerequisite is the inclusion of a limited number of regressors with high explanatory power in the model, stability over time, and explicit economic interpretation. The paper confirms the key hypothesis on high degree of issuer's rating on the yield spread which is a new step in the study of the Russian market. The findings prove that the yield spread is determined mainly by the level of risk corresponding to the degree of the issuer's reliability. The issuer's industry affiliation, the size of the company, the MSCI stock index has also a significant impact on the spread. Among the advantages of the proposed model is its relative simplicity, explicit economic interpretation and stable response to various data which determine the practical significance of the work. The approaches to building and testing the model applied in this work can be useful in further studies aimed at developing predictive models of this class.

Corporate bond spreads and understated pension liabilities

PurposeThe question is whether debt market investors see through managers' attempts to hide their pension obligations. The authors establish a robust relation between understated pension liabilities and corporate bond yield spreads after controlling for factors that have been previously identified as having a significant impact on firms' cost of borrowing. The results support the idea that bond market investors are not being misled by the use of high pension liability discount rates by some companies to lower their reported pension obligations. For a small fraction of debt issuers, the reported pension liabilities are larger than the pension liabilities valued at the stipulated interest rate benchmarks. For these issuers with overstated pension liabilities, bond investors adjust their borrowing costs downward.Design/methodology/approachThe authors investigate the relation between corporate bond yield spreads and understated pension liabilities relative to long-term Treasury and high-grade corporate bond yields. They aim to answer two questions. First, what are the sizes of over or understated pension liabilities relative to guideline benchmarks? Second, do debt market investors see through the potential management manipulation of pension discount rates? The authors find that firms with large understated pension liabilities face higher marginal borrowing costs after taking into account issue-specific features, firm characteristics, macroeconomic conditions and other pension information such as funded status and mandatory contributions.FindingsThe average understated projected benefit obligations (PBOs) are understated by $394.3 and $335.6, equivalent to 3.5 and 3.0% of the beginning of the fiscal year market value, respectively. The average understated accumulated benefit obligations (ABOs) are understated by $359.3 and $305.3 million, equivalent to 3.1 and 2.6%, of the beginning of the fiscal year market value, respectively. Relative to AA-grade corporate bond yields, the average difference between firm pension discount rates and benchmark yields becomes much smaller; the percentage of firm pension discount rates higher than benchmark yields is also much smaller. As a result, understated pension liabilities become negligible. The authors establish a robust relation between corporate bond yield spreads and measures of understated pension liabilities after controlling for issue-specific features, firm characteristics, other pension information (funded status and mandatory contributions), macroeconomic conditions, calendar effects and industry effects.Originality/valueS&P Rating Services recognizes the issue that there is considerably more variability in discount rate assumptions among companies than in workforce demographics or the interest rate environment in which firms operate (Standard and Poor's, 2006). S&P also indicates that it would be desirable to normalize different discount rate assumptions but acknowledges that it is difficult to do so. In practice, S&P Rating Services conducts periodic surveys to see whether firms' assumed discount rates conform to the normal standard. The paper makes an initial attempt to quantify the size of understated pension liabilities and their impact on corporate bond yield spreads. This approach can be extended to study firms' costs of equity capital, the pricing of seasoned equity offerings and the pricing of merger and acquisition transaction deals, among other questions.

Corporate Social Responsibility and Bond Price at Issuances: U.S. Evidence

Bondholders are arm’s-length lenders with limited insider information. In this paper, we explore whether corporate social responsibility (CSR) activities could work as an information channel for bondholders to better understand the riskiness of bond-issuing firms. We find a significant negative relation between CSR scores and corporate bond yield spread, especially for firms which invest heavily in diversity and community relations, suggesting that CSR firms are less risky. The result is robust to different model specifications and endogeneity issues. In addition, the negative relation between the CSR score and bond yield spread is significant only if a firm has a strong internal governance mechanism.

Transmission of the Greek crisis on the sovereign debt markets in the euro area.

We test for the contagion effects stemming from the Greek debt crisis in the daily 10-year sovereign bond yield spreads in nine Economic and Monetary Union (EMU) countries. To this end, we estimate the dynamic conditional correlation (DCC) model of Engle (2002) from January 01, 2003 to December 31, 2015. In addition, we calculate and plot the upper and lower bounds of the confidence interval for each DCC series. To the best of our knowledge, this approach of Kchaou and Bellalah (2020) has never been used to study the contagion of the subprime and Greek crises between the 10-year sovereign bond yield spreads of the main EMU countries. Consequently, this approach enables us to compare our results with those of previous works based on other methods. It also offers useful insights to policy makers to address the contagion effect through the implementation of adequate measures. Although the Greek spread played the role of a global factor for the majority of countries during the observation period, the results invalidate the existence of contagious episodes resulting from the Hellenic crisis. We justify these findings either by the weakness of the weight of the Greek economy in the euro area or by the effectiveness of the unconventional monetary policies taken by the European Central Bank (ECB), the bailouts for Greece in 2010, 2012 and 2015 and the austerity measures and structural reforms implemented by the governments of EMU countries. Moreover, DCC between Greece and the other countries have shown a downward behavior during the acute phases of Greek crisis, suggesting a disintegration of the Hellenic bond market with those of other euro area countries during periods of financial turmoil. Furthermore, the results indicate that the subprime crisis affected a large part of these markets well before the bankruptcy of Lehman Brothers. All these findings provide valuable information for international investors, central bankers and policymakers.