The Term Structure of Credit Spreads and the Cross-Section of Stock Returns

49 Pages Posted: 6 Feb 2015 Last revised: 27 Apr 2016

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

Avanidhar Subrahmanyam

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

Yi Zhou

San Francisco State University

Date Written: February 22, 2015

Abstract

We explore the link between credit and equity markets by considering the informational content of the term structure of credit spreads. A shallower credit term structure predicts decreases in default risk, increases in future profitability, as well as favorable earnings surprises. Further, the slope of the credit term structure negatively predicts future stock returns. While systematic slope risk is also priced, information diffusion from the credit market to equities, particularly in less visible stocks, plays an additional role in accounting for return predictability from credit slopes: Such predictability is less evident in stocks with high institutional ownership, analyst coverage, and liquidity, and vice versa.

Keywords: cross-section of stock return, credit spreads, term structure, slow information diffusion, limited attention, default risk premium

Suggested Citation

Han, Bing and Subrahmanyam, Avanidhar and Zhou, Yi, The Term Structure of Credit Spreads and the Cross-Section of Stock Returns (February 22, 2015). Journal of Financial Economics (JFE), Forthcoming; Rotman School of Management Working Paper No. 2560693. Available at SSRN: https://ssrn.com/abstract=2560693 or http://dx.doi.org/10.2139/ssrn.2560693

Bing Han (Contact Author)

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Avanidhar Subrahmanyam

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

Yi Zhou

San Francisco State University ( email )

College of Business
1600 Holloway Avenue
San Francisco, CA 94132
United States
(415) 338-2661 (Phone)
(415) 338-0596 (Fax)

HOME PAGE: http://cob.sfsu.edu/directory/yi-zhou

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