De Facto Seniority, Credit Risk, and Corporate Bond Prices

Forthcoming, Review of Financial Studies

Fisher College of Business Working Paper No. 2017– 17

67 Pages Posted: 8 Sep 2017

See all articles by Jack Bao

Jack Bao

University of Delaware - Department of Finance

Kewei Hou

Ohio State University (OSU) - Department of Finance

Date Written: September 7, 2017

Abstract

We study the effect of a bond's place in its issuer's maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers' maturity structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evidence that these later bonds have larger yield spreads and greater comovement with equity and that the magnitude of the effects is consistent with model predictions for investment-grade bonds. Our results highlight the importance of bond-specific credit risk for understanding corporate bond prices.

Keywords: Credit Risk, Structural Models of Default, Comovement, Corporate Bonds

JEL Classification: G12, G13, G14

Suggested Citation

Bao, Jack and Hou, Kewei, De Facto Seniority, Credit Risk, and Corporate Bond Prices (September 7, 2017). Forthcoming, Review of Financial Studies, Fisher College of Business Working Paper No. 2017– 17, Available at SSRN: https://ssrn.com/abstract=3033945

Jack Bao

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Kewei Hou (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

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