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http://ssrn.com/abstract=1734528
 
 

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Issuer Quality and the Credit Cycle


Robin M. Greenwood


Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Samuel Gregory Hanson


Harvard Business School

June 28, 2011

Harvard Business School Working Paper No. 1734528

Abstract:     
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.

Number of Pages in PDF File: 46

Keywords: credit risk, credit bubbles, forecasting regressions, debt issuance, quality

JEL Classification: G14, G32

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Date posted: January 5, 2011 ; Last revised: June 28, 2011

Suggested Citation

Greenwood, Robin M. and Hanson, Samuel Gregory, Issuer Quality and the Credit Cycle (June 28, 2011). Harvard Business School Working Paper No. 1734528. Available at SSRN: http://ssrn.com/abstract=1734528 or http://dx.doi.org/10.2139/ssrn.1734528

Contact Information

Robin M. Greenwood (Contact Author)
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6979 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Samuel Gregory Hanson
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
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