Issuer Quality and the Credit Cycle

47 Pages Posted: 11 Jul 2011 Last revised: 28 Jun 2024

See all articles by Robin M. Greenwood

Robin M. Greenwood

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

Samuel Gregory Hanson

Harvard University - Business School (HBS)

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Date Written: July 2011

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.

Suggested Citation

Greenwood, Robin M. and Hanson, Samuel Gregory, Issuer Quality and the Credit Cycle (July 2011). NBER Working Paper No. w17197, Available at SSRN: https://ssrn.com/abstract=1882165

Robin M. Greenwood (Contact Author)

Harvard Business School - Finance Unit ( email )

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Samuel Gregory Hanson

Harvard University - Business School (HBS) ( email )

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