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Dissecting the bond profitability premium

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  • Campbell, T. Colin
  • Chichernea, Doina C.
  • Petkevich, Alex

Abstract

In contrast to prior equity market results, we document that corporate bonds issued by low profitability firms outperform bonds issued by highly profitable firms. This performance difference is primarily driven by low profitability, low credit rating firms. This profitability premium is consistent with compensation for default risk and can be explained by default risk factors that include speculative-grade bonds. The impact of profitability on equity returns depends on the relative importance of default risk and the risk of the firm׳s investments when solvent, consistent with higher profitability signaling both lower future distress and riskier investments resulting in higher discount rates.

Suggested Citation

  • Campbell, T. Colin & Chichernea, Doina C. & Petkevich, Alex, 2016. "Dissecting the bond profitability premium," Journal of Financial Markets, Elsevier, vol. 27(C), pages 102-131.
    • Handle: RePEc:eee:finmar:v:27:y:2016:i:c:p:102-131
    DOI: 10.1016/j.finmar.2015.11.002
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    More about this item

    Keywords

    Profitability; Bonds; Equity; Credit risk; Discount rates;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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