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Issuer Quality and the Credit Cycle

  • Robin Greenwood
  • Samuel G. Hanson
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    We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns.

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    File URL: http://www.nber.org/papers/w17197.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17197.

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    Date of creation: Jul 2011
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    Publication status: published as Greenwood, Robin, and Samuel G. Hanson. "Issuer Quality and Corporate Bond Returns." Review of Financial Studies 26, no. 6 (June 2013): 1483–1525.
    Handle: RePEc:nbr:nberwo:17197
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    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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