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Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns

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  • Bartram, Söhnke
  • Grinblatt, Mark
  • Nozawa, Yoshio

Abstract

A corporate bond’s book value divided by its market price predicts its return from actual transactions occurring at least eight days after signal observation. Senior bonds with the 20% highest “bond book-to-market ratios†outperform their lowest-quintile counterparts by at least 3–4% per year, even for subsamples restricted to investment-grade ratings. The universe of all bonds exhibits even larger spreads. These findings control for liquidity, default, market microstructure, and priced asset risk inferred from yields, credit spreads, bid-ask spreads, structural model equity hedges, duration, bond ratings, industry, maturity, and coupons. Efficient markets stories cannot explain the spread, particularly in light of the substantial decay in alpha when implementation is delayed, the negligible role of credit risk and liquidity in signal efficacy, the degree to which return spreads exceed yield spreads, and the significant spreads left after accounting for factor risk, including a bond-specific “value factor.†We also rule out off-market pricing provided by central dealers or provided to favored customers.

Suggested Citation

  • Bartram, Söhnke & Grinblatt, Mark & Nozawa, Yoshio, 2022. "Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns," CEPR Discussion Papers 17592, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17592
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    More about this item

    Keywords

    Corporate bonds; Market efficiency; Credit risk; Transaction costs; Point-in-time (pit); Book-to-market;
    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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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