Breadth of Ownership and the Cross-Section of Corporate Bond Returns

42 Pages Posted: 9 Feb 2018 Last revised: 25 Sep 2020

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Nan Qin

College of Business, Northern Illinois University

Ying Wang

State University of New York at Albany - School of Business

Date Written: January 1, 2018

Abstract

We investigate the effects of short sale constraints on asset mispricing in the corporate bond market. Consistent with Miller (1977)’s theory that short sale constraints can lead to asset overpricing, we document a significant positive relation between changes in ownership breadth (a proxy for short sale constraints) and the cross-section of future corporate bond returns. The return predicative power of changes in breadth is shown to be relatively short-lived in the corporate bond market, possibly due to the bounded upside payoffs of debt. Further analysis shows that the return predictability of changes in breadth is stronger among bonds with higher credit risk and during periods of high investor sentiment, and is mainly driven by bond overpricing rather than underpricing. Overall, the impact of short sale constraints on bond mispricing appears to be more pronounced when overpricing is more likely.

Keywords: Short sale constraints, corporate bond returns, ownership breadth, return predictability, bond overpricing

JEL Classification: G12, G23

Suggested Citation

Huang, Jing-Zhi Jay and Qin, Nan and Wang, Ying, Breadth of Ownership and the Cross-Section of Corporate Bond Returns (January 1, 2018). Available at SSRN: https://ssrn.com/abstract=3113892 or http://dx.doi.org/10.2139/ssrn.3113892

Jing-Zhi Jay Huang

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Nan Qin

College of Business, Northern Illinois University

1425 W. Lincoln Hwy.
DEKALB, IL 60115
United States

Ying Wang (Contact Author)

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

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