IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v14y2009i1d10.1007_s11142-007-9056-x.html
   My bibliography  Save this article

How does the corporate bond market value capital investments and accruals?

Author

Listed:
  • Sanjeev Bhojraj

    (Cornell University)

  • Bhaskaran Swaminathan

    (Cornell University)

Abstract

This paper examines whether the mispricing of accruals documented in equity markets extends to bond markets. The paper finds that corporate bonds of firms with high operating accruals underperform corporate bonds of firms with low operating accruals. In the first year after portfolio formation, the underperformance is 115 basis points using an accrual measure that includes capital investments and 93 basis points using an accrual measure that is based only on working capital investments. The Sharpe ratios of the zero-investment bond accrual portfolios are comparable to those of the corresponding zero-investment stock accrual portfolios. The results are also robust to risk adjustments based on both a factor model consisting of the Fama and French (J. Financial Econ 33 (1993) 3) stock and bond market factors and a characteristics model based on bond ratings and duration. Cross-sectional Fama–MacBeth regressions that use individual bond data and control for stock and bond issuances in addition to ratings and duration also confirm the time-series portfolio findings. Overall, our results reveal an accrual anomaly among bonds similar to that observed among stocks.

Suggested Citation

  • Sanjeev Bhojraj & Bhaskaran Swaminathan, 2009. "How does the corporate bond market value capital investments and accruals?," Review of Accounting Studies, Springer, vol. 14(1), pages 31-62, March.
    • Handle: RePEc:spr:reaccs:v:14:y:2009:i:1:d:10.1007_s11142-007-9056-x
    DOI: 10.1007/s11142-007-9056-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-007-9056-x
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-007-9056-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    2. Richardson, Scott A. & Sloan, Richard G. & Soliman, Mark T. & Tuna, Irem, 2005. "Accrual reliability, earnings persistence and stock prices," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 437-485, September.
    3. Hirshleifer, David & Kewei Hou & Teoh, Siew Hong & Yinglei Zhang, 2004. "Do investors overvalue firms with bloated balance sheets?," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 297-331, December.
    4. Cohen, Daniel A. & Lys, Thomas Z., 2006. "Weighing the evidence on the relation between external corporate financing activities, accruals and stock returns," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 87-105, October.
    5. Konan Chan & Louis K. C. Chan & Narasimhan Jegadeesh & Josef Lakonishok, 2006. "Earnings Quality and Stock Returns," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1041-1082, May.
    6. Duffee, Gregory R, 1999. "Estimating the Price of Default Risk," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 197-226.
    7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    8. Edwin J. Elton & Martin J. Gruber & Deepak Agrawal & Christopher Mann, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, February.
    9. Whitney Newey & Kenneth West, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    10. Loughran, Tim & Ritter, Jay R., 2000. "Uniformly least powerful tests of market efficiency," Journal of Financial Economics, Elsevier, vol. 55(3), pages 361-389, March.
    11. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    12. Gailen Hite & Arthur Warga, 1997. "The Effect of Bond-Rating Changes on Bond Price Performance," Financial Analysts Journal, Taylor & Francis Journals, vol. 53(3), pages 35-51, May.
    13. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    14. Gwangheon Hong & Arthur Warga, 2000. "An Empirical Study of Bond Market Transactions," Financial Analysts Journal, Taylor & Francis Journals, vol. 56(2), pages 32-46, March.
    15. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    16. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    17. Jacob K. Thomas & Huai Zhang, 2002. "Inventory Changes and Future Returns," Review of Accounting Studies, Springer, vol. 7(2), pages 163-187, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Papanastasopoulos, Georgios & Thomakos, Dimitrios & Wang, Tao, 2011. "Accruals and the performance of stock returns following external financing activities," The British Accounting Review, Elsevier, vol. 43(3), pages 214-229.
    2. Jacobs, Heiko, 2015. "What explains the dynamics of 100 anomalies?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 65-85.
    3. Jin (Ginger) Wu & Lu Zhang & X. Frank Zhang, 2010. "The q‐Theory Approach to Understanding the Accrual Anomaly," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 48(1), pages 177-223, March.
    4. Brisker, Eric R. & Autore, Don M. & Colak, Gonul & Peterson, David R., 2014. "Executive compensation structure and the motivations for seasoned equity offerings," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 330-345.
    5. Gikas Hardouvelis & Georgios Papanastasopoulos & Dimitrios Thomakos & Tao Wang, 2012. "External Financing, Growth and Stock Returns," European Financial Management, European Financial Management Association, vol. 18(5), pages 790-815, November.
    6. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    7. Kent Daniel & David Hirshleifer & Lin Sun, 2020. "Short- and Long-Horizon Behavioral Factors," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1673-1736.
    8. 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.
    9. Chan, Konan & Lin, Yueh-hsiang & Wang, Yanzhi, 2015. "The information content of R&D reductions," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 131-155.
    10. Samir Kadiric & Arthur Korus, 2019. "The effects of Brexit on credit spreads: Evidence from UK and Eurozone corporate bond markets," International Economics and Economic Policy, Springer, vol. 16(1), pages 65-102, March.
    11. Stephanie Heck, 2022. "Corporate bond yields and returns: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(2), pages 179-201, June.
    12. Kothari, S.P. & Loutskina, E. & Nikolaev, V., 2006. "Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly," Discussion Paper 2006-103, Tilburg University, Center for Economic Research.
    13. Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 410-454, December.
    14. Deniz Anginer & Çelim Yıldızhan, 2018. "Is There a Distress Risk Anomaly? Pricing of Systematic Default Risk in the Cross-section of Equity Returns [The risk-adjusted cost of financial distress]," Review of Finance, European Finance Association, vol. 22(2), pages 633-660.
    15. Kothari, S.P. & Loutskina, E. & Nikolaev, V., 2006. "Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly," Other publications TiSEM 3f380fcf-b0ca-4198-86f8-9, Tilburg University, School of Economics and Management.
    16. Wahyudi, Imam & Robbi, Abdu, 2009. "Exploring Determinant Factors of Bond Trading with Inventory Management Theory (Case Study of Indonesian Capital Market, January – March 2009)," MPRA Paper 59883, University Library of Munich, Germany, revised 16 Jul 2010.
    17. Jun Yang, 2008. "Macroeconomic Determinants of the Term Structure of Corporate Spreads," Staff Working Papers 08-29, Bank of Canada.
    18. Gikas Hardouvelis & George Papanastasopoulos & Dimitrios D. Thomakos & Tao Wang, 2007. "Accruals, Net Stock Issues and Value-Glamour Anomalies: New Evidence on their Relation," Working Paper series 47_07, Rimini Centre for Economic Analysis.
    19. Andreou, Christoforos K. & Lambertides, Neophytos & Panayides, Photis M., 2021. "Distress risk anomaly and misvaluation," The British Accounting Review, Elsevier, vol. 53(5).
    20. Robin Greenwood & Samuel G. Hanson, 2013. "Issuer Quality and Corporate Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1483-1525.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:14:y:2009:i:1:d:10.1007_s11142-007-9056-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.