Are Capital Market Anomalies Common to Equity and Corporate Bond Markets? An Empirical Investigation

55 Pages Posted: 11 Aug 2014 Last revised: 9 Jun 2017

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Amit Goyal

University of Lausanne; Swiss Finance Institute

Yoshio Nozawa

Hong Kong University of Science and Technology

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Qing Tong

School of Business, Renmin University of China

Date Written: August 6, 2016

Abstract

A significant fraction of firms' financing occurs via public debt markets. Accordingly, we investigate whether financial statement characteristics and other variables that predict equity returns also predict corporate bond returns. Profitability, asset growth, and equity market capitalization negatively predict corporate bond returns, but other predictors, like accruals and earnings surprises, do not. Since smaller, unprofitable firms should be more risky, and firms with high asset growth (or high real investment) should have lower required returns, the evidence indicates that corporate bond returns accord with the risk-reward paradigm. Stock markets lead bond markets, consistent with equities aggregating diverse information and transmitting it to bonds. Overall, we find that accounting for transaction costs, bonds are efficiently priced.

Suggested Citation

Chordia, Tarun and Goyal, Amit and Nozawa, Yoshio and Subrahmanyam, Avanidhar and Tong, Qing, Are Capital Market Anomalies Common to Equity and Corporate Bond Markets? An Empirical Investigation (August 6, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2478550 or http://dx.doi.org/10.2139/ssrn.2478550

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Amit Goyal

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Yoshio Nozawa

Hong Kong University of Science and Technology ( email )

Clearwater Bay Road
Sai Kun, NT
Hong Kong

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Qing Tong

School of Business, Renmin University of China ( email )

Beijing
China

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