Which Factors Affect Corporate Bond Pricing? Evidence from Eurobonds Primary Market Spreads

Abstract

The question of which factors are relevant in determining corporate bonds pricing is empirically investigated by analyzing the issuance spreads of eurobonds completed by Canadian, European, Japanese and U.S. companies during the 1991-2001 eleven year period. A unique dataset of spreads, ratings and other relevant bond variables is used for a sample of 3,403 eurobonds issues. Four main results emerge from the empirical analysis. First, the ratings of corporate bonds are the most important determinant of spreads between the yield to maturity of bonds and that of equivalent Treasury securities. Second, bond investors' reliance on rating agencies judgements has increased over time during the sample period. Third, while a bond's expected tax treatment represents a relevant factor explaining spreads cross-sectional variability, the primary market efficiency and the expected secondary market liquidity appear as poor explanatory variables. Finally, empirical evidence shows that rating agencies adopt a different, "through the cycle" evaluation criteria of obligors' creditworthiness with respect to the forward looking one adopted by bond investors.

Keywords: Eurobond, rating, spread, default risk

JEL Classification: G12, G14, G15