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Issuer Quality and the Credit Cycle

46 Pages Posted: 5 Jan 2011 Last revised: 28 Jun 2011

Robin M. Greenwood

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

Samuel Gregory Hanson

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 28, 2011


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.

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

JEL Classification: G14, G32

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: or

Robin 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 Hanson

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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