Dissecting the Bond Profitability Premium

58 Pages Posted: 6 Oct 2015

See all articles by T. Colin Campbell

T. Colin Campbell

University of Cincinnati - Department of Finance - Real Estate

Doina Chichernea

University of Denver - Reiman School of Finance

Alex Petkevich

The University of Toledo - Department of Finance

Date Written: October 5, 2015

Abstract

In contrast to prior equity market results, we document that corporate bonds issued by low profitability firms outperform bonds issued by highly profitable firms. This performance difference is primarily driven by low profitability, low credit rating firms. This profitability premium is consistent with compensation for default risk and can be explained by default risk factors that include speculative-grade bonds. The impact of profitability on equity returns depends on the relative importance of default risk and the risk of the firm's investments when solvent, consistent with higher profitability signaling both lower future distress and riskier investments resulting in higher discount rates.

Keywords: Profitability, Bonds, Equity, Credit Risk, Discount Rates

JEL Classification: G11, G12

Suggested Citation

Campbell, Timothy Colin and Chichernea, Doina and Petkevich, Alex, Dissecting the Bond Profitability Premium (October 5, 2015). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2669632

Timothy Colin Campbell

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Doina Chichernea

University of Denver - Reiman School of Finance ( email )

2101 S. University Blvd
Denver, CO 80208
United States

Alex Petkevich (Contact Author)

The University of Toledo - Department of Finance ( email )

2801 W. BANCROFT ST.
Mail Stop 103
Toledo, OH Ohio 43606
United States

HOME PAGE: http://homepages.utoledo.edu/apetkev

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