Corporate Bond Prices Research Articles

Do regional trusts alleviate bond market risks? Evidence from the Chinese municipal corporate bond pricing

Municipal corporate bonds have attracted significant attention due to their pricing mechanisms and reflect China's distinct financial landscape. Existing research has highlighted the influence of informal institutional factors on bond pricing. This study introduces the social trust index to measure regional trust levels and assesses its correlation with municipal corporate bond issuance pricing. The empirical analysis indicates that higher regional trust levels are significantly associated with reduced issuance credit spreads for municipal corporate bonds. The relationship is moderated by local economic development and the strength of implicit government guarantees. Employing the “Yongmei” event as a case study, this research explores the dynamics of bond pricing mechanisms following a reduction in government implicit guarantees and finds that a weakening of these guarantees intensifies the influence of regional trust on credit spreads. Additionally, default events are observed to have spillover effects, impacting neighboring provinces and the overall market. This research extends the investigation of regional trust's pricing mechanisms to the municipal corporate bond market, thereby enriching the study of informal institutions' impact on financial market pricing. The findings underscore the importance of effectively harnessing market mechanisms by governments to mitigate risks in the municipal corporate bond sector.

Duration-Based Valuation of Corporate Bonds

Abstract We decompose corporate bond and equity index returns into duration-matched government bond returns and the excess returns over this duration-matched counterfactual, which we term duration-adjusted returns. Compared with previously used excess return definitions (ie, returns in excess of Treasury bills), our decomposition leads to markedly different return patterns and asset pricing implications. In particular, we find that investment-grade bonds earn a small credit risk premium, comparable in magnitude to the convenience yield, and that duration adjustment resolves the CAPM’s failure to price corporate bonds. These findings highlight the importance of adjusting for nonstationary interest rate environments in asset pricing tests. (JEL G10, G12)

The effect of ASC 842 leases on bond yields

This study examines how the formal recognition of lease liabilities required by ASC 842 affects corporate bonds pricing. We document significant bond yield increases with the unexpected off-balance sheet liability revealed by the company. The yield reaction displays an asymmetric pattern, with an increase in yields for previously underestimated operating lease liabilities, but no correction for overestimations. Credit ratings are more likely to be downgraded at firms with severely underestimated operating leases. Collectively, our results suggest that ASC 842 has implications for corporate bond pricing.

The Impact of Liquidity Risk on Corporate Bond Pricing in China

This paper investigates the impact of liquidity risk on bond pricing in the bond market after the end of COVID-19. The paper hypothesizes a significant impact of liquidity risk on bond pricing in the bond market and introduces several variables such as liquidity ratio, coupon rate, issuance cycle, return on equity (ROE), and issuance volume for testing. The paper analyses and compares the impact of liquidity risk on corporate bond pricing through least squares (OLS) regression analysis (data from the iFinD database). The study shows that the liquidity risk of bonds has a significant impact on the market interest rate of corporate bonds, which directly proves that the impact of liquidity risk on corporate bond pricing in the bond market is highly significant. This paper reveals that liquidity risk is crucial to bond pricing in the bond market that liquidity risk is a key factor in determining the degree of stability of bond prices, and that illiquidity leads to increased uncertainty in bond pricing and market volatility. Investors need to have a more comprehensive perspective to rationally price bonds under the disturbance of liquidity risk and pay attention to the impact of liquidity risk on the bond market.

WITHDRAWN: Bond market reform and investors' risk awareness: Evidence from the issuing pricing of corporate bonds in China

In January 2015, the administrative measures for issuance and trading of corporate bonds (hereinafter referred to as the administrative measures) established the rudiment of "registration system" for issuance of corporate bonds in China. Through empirical tests, this paper finds that the promulgation of the administrative measures has a significant impact on the credit spread of corporate bonds issuance. After the promulgation of the administrative measures, investors' risk awareness has been significantly improved and the ability of risk identification significantly enhanced. The regression result shows that after the implementation of the "registration system" in China's bond market, by redefining and dividing the rights and responsibilities of the securities regulatory authorities, market investors and other participants, the market participants should bear the corresponding responsibilities, which can cultivate the professional ability and risk awareness of investors, so as to promote the healthy and orderly development of the securities market. In order to ensure the stable development of the bond market, as a securities regulatory department, on the one hand, it should pay more attention to the education of investors, break the rigid belief of investors, strengthen the risk awareness of investors, cultivate the risk identification ability of investors, and enhance the professional investment ability of investors, on the other hand, it should strengthen investor protection.

Deconstruction of ESG Impacts on US Corporate Bond Pricing: The Cost of Capital Benefits Across Industry Sectors

Deconstruction of ESG Impacts on US Corporate Bond Pricing: The Cost of Capital Benefits Across Industry Sectors

Pricing Corporate Bonds with Credit Risk Primitives

Pricing Corporate Bonds with Credit Risk Primitives

ESG rating confusion and bond spreads

This paper investigates the influence of ESG rating confusion on bond spreads, an area of growing importance in sustainable finance. Despite the recognition of ESG rating confusion, their effects on the bond market remain less explored. Leveraging a corporate bond pricing model, we reveal that ESG rating confusion widens the bond spread. Analyzing data from China, we find that both primary and secondary bond markets are affected, with the latter experiencing a more significant impact. Our study emphasizes the role of information asymmetry and investor preferences, outweighing the issuer’s financial position in driving these effects. Furthermore, we identify environmental and weighting inconsistencies as crucial sources of ESG rating confusion. The findings underscore the necessity of a standardized ESG rating system to enhance investor confidence and support ESG-related project financing. A cohesive rating approach among agencies correlates with narrower bond spreads, thereby fostering bond market efficiency and promoting ESG investment practices.

Debt dynamics and credit risk

We investigate how the dynamics of corporate debt policy affect the pricing of corporate bonds. We find empirically that debt issuance has a significant stochastic component that is imperfectly correlated with shocks to asset value. As a consequence, the volatility of leverage is significantly higher than asset volatility over short horizons. At long horizons, the relation between leverage and asset volatility is reversed due to mean reversion in leverage. We incorporate these stochastic debt dynamics into structural models of credit risk, both standard diffusion models as well as newer models with stochastic volatility and jumps. Including stochastic debt gives more accurate predictions of credit spreads in both the cross-section and the time series.

Connectedness of COVID vaccination with economic policy uncertainty, oil, bonds, and sectoral equity markets: evidence from the US.

We examine the connectedness of the COVID vaccination with the economic policy uncertainty, oil, bonds, and sectoral equity markets in the US within time and frequency domain. The wavelet-based findings show the positive impact of COVID vaccination on the oil and sector indices over various frequency scales and periods. The vaccination is evidenced to lead the oil and sectoral equity markets. More specifically, we document strong connectedness of vaccinations with communication services, financials, health care, industrials, information technology (IT) and real estate equity sectors. However, weak interactions exist within the vaccination-IT-services and vaccination-utilities pairs. Moreover, the effect of vaccination on the Treasury bond index is negative, whereas the economic policy uncertainty shows an interchanging lead and lag relation with vaccination. It is further observed that the interrelation between vaccination and the corporate bond index is insignificant. Overall, the impact of vaccination on the sectoral equity markets and economic policy uncertainty is higher than on oil and corporate bond prices. The study offers several important implications for investors, government regulators, and policymakers.

Confucian culture and corporate bond pricing

We investigate the effect of Confucian culture on corporate bond pricing. Using the birthplace data of 56,759 Jinshi in the Ming and Qing dynasties to construct a proxy of Confucian culture, we find a significantly negative relation between Confucian culture and bond pricing: the stronger the Confucian atmosphere of the corporate headquarters’ location, the higher the bond rating and the lower the credit spread. This conclusion still holds after using the distance to the nearest ancient printing office as an instrumental variable and a series of robustness tests. The mechanism test shows that Confucian culture can improve the pricing efficiency of corporate bonds by fostering investors’ trust, alleviating principal–agent problems and restraining bad corporate behaviors. Moreover, the impact of Confucian culture on corporate bond pricing is greater for firms located in regions with weak legal and other formal institutional constraints and for unlisted companies. Our study complements the literature on culture and bond pricing, and provides policy insights from traditional Chinese wisdom for improving the efficiency of financial markets.

Do bond market participants care about directors’ and officers’ liability insurance?——Empirical evidence based on the pricing of corporate bonds

ABSTRACT Based on the risk hedging perspective, this paper examines the impact of directors’ and officers’ liability insurance (hereafter referred to as D&O liability insurance) on the pricing of corporate bonds. We find that the purchase of D&O liability insurance can effectively reduce corporate bond insurance pricing. The path test shows that the purchase of D&O liability insurance can reduce the bond insurance pricing by improving the quality of company’s internal control. Furthermore, the paper finds that when management power is greater, investor protection is poor or financial risk is high,the impact of the D&O liability insurance is stronger. After purchasing D&O liability insurance, creditors will reduce the use of corporate governance contractual terms, but will set more investments and financing as well as option contractual terms. In addition, companies that purchase D&O liability insurance issue bonds with higher credit ratings and longer bond maturities.

Corporate Bondholder Reactions to Bank Loan Covenant Violations and the Evolution of Bank Loan Covenants

This paper examines firms’ corporate bond price reactions to bank loan covenant violations. Using an event study approach, we find that firms’ bond price response is marginally negative in the 1990s and becomes significantly positive in the 2000s. The positive bond price reactions suggest bondholders benefit from bank loan covenant violations in more recent years. Specifically, bank loan covenant violations enable banks to step in and take necessary actions to protect creditors’ interests, which benefit not only private lenders but also public corporate bondholders. In addition, the temporal change in bond price response suggests the disciplining role of bank loan covenants becomes increasingly important in recent years: banks gradually take debt covenants as “trip wires”, which give banks an option to take necessary actions when the early warning signal shows up through covenant violations. Furthermore, we find that bondholders and stockholder reactions are positively correlated in recent years, and that managerial entrenchment could decrease banks’ influence after violations.

PENGARUH KUPON, SISA UMUR OBLIGASI DAN YIELD TO MATURITY TERHADAP HARGA OBLIGASI KORPORASI DI BEI

This study aims to determine and explain the effect of bond coupons, remaining bond life, and yield to maturity on the price of corporate bonds on the Indonesia Stock Exchange. To achieve this goal, a study with a research period of 2017 - 2019 was conducted on 22 companies that issue bonds. By using purposive sampling as a sampling technique, 105 data were observed. The analytical method used is multiple regression analysis. The results showed that the bond coupon variable had a positive and significant effect on bond prices, the remaining life of the bonds had a significant effect on bond prices. The direction of the effect of the remaining life of the bond on the price of the bond depends on the price of the bond, whether the price of the bond is perium or the discount price. Furthermore, yield to maturity has a negative and significant effect on bond prices. The ability of these three variables to explain variations in bond prices is 66.1 percent.

Spread determinants in corporate bond pricing: The effect of market and liquidity risks

This paper investigates the effect of market and liquidity risks on corporate bond pricing in Turkey, an emerging market, and in Europe. Results show that corporate bond returns have exposure to liquidity factors and not to market factors in both settings. Corporate bonds issued in Turkey have significant exposure to fluctuations in benchmark treasury bond liquidity and corporate bond market liquidity; while corporate bonds issued in Eurozone have exposure to equity market liquidity and are sensitive to fluctuations in a 10-year generic government bond liquidity. The total estimated liquidity risk premium is 0.7% per annum for Turkish ?A? and above graded corporate bonds, and 1.08% for the last investment grade level (BBB-) long-term bonds. For Eurozone, the total liquidity risk premium is 0.27% for investment grade 5-10 year term bonds, 1.05% for high-yield 1-5 year term bonds and 1.02% for high-yield 5-10 year term category.

The Effects of ESG Performance and Preferences on U.S. Corporate Bond Prices

The Effects of ESG Performance and Preferences on U.S. Corporate Bond Prices

Salience Theory and Corporate Bond Pricing

Salience Theory and Corporate Bond Pricing

Corporate Bond Pricing Model with Interaction between Liquidity and Credit Risk

This study derives a liquidity and credit risk‐adjusted capital asset pricing model and investigates the model using the data set in China's corporate bond market. Our research shows that the channels through which liquidity risk affects corporate bond return are individual bond liquidity risk, the interaction between individual bond liquidity risk and market liquidity risk. The channels through which credit risk affects corporate bond return are individual bond credit risk, the interaction between individual bond credit risk and market credit risk. The main channel through which the interaction between liquidity risk and credit risk affects corporate bond return is the interaction between individual bond liquidity risk and market credit risk. The model reveals the impact mechanism of individual risk and market risk on bond return and explains why the interaction between liquidity risk and credit risk affects bond pricing.

The financial value of the within-government political network: Evidence from Chinese municipal corporate bonds

This paper examines the effect of the political network of Chinese municipal leaders on the pricing of municipal corporate bonds. Using municipal leaders’ working experience to measure the political network, we find that this network reduces the bond issuance yield spreads by improving the credit ratings of the issuer, the local government financing vehicle. The relationship between political networks and issuance yield spreads is strengthened in areas where financial markets and legal systems are less developed.

Endogenous inattention and risk-specific price underreaction in corporate bonds

Corporate bond prices are slow to respond to default risk and interest rate shocks, as proxied by firm-level stock returns and Treasury returns, respectively. Furthermore, the underreaction is risk-specific: bonds with better credit quality underreact more to default risk, while those with worse quality underreact more to interest rates. The underreactions imply substantial out-of-sample return predictability, and investors appear to be leaving too much money on the table. The results are consistent with behavioral inattention models in which investors endogenously allocate more attention to payoff-relevant (or salient) risks, and they are not explained by traditional trading friction mechanisms.