Breadth of Ownership and the Cross Section of Corporate Bond Returns

Management Science, Forthcoming

70 Pages Posted: 9 Feb 2018 Last revised: 17 Apr 2023

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: April 1, 2023

Abstract

Using breadth of corporate bond fund ownership to proxy for the combination of short-sale constraints and divergence of opinions in the corporate bond market, this paper investigates whether and to what extent Miller’s (1977) theory holds for corporate bonds. Consistent with the theory, we document a significant and positive relation between changes in breadth and the cross section of future corporate bond returns. Due to the bounded upside of debt, the ability of changes in breadth to predict returns appears to be less pronounced for corporate bonds relative to stocks. Furthermore, this predictability is stronger among bonds with higher credit risk, indicating that the effect of short-sale constraints and divergence of opinions on bond mispricing tends to be larger for riskier bonds with more upside potential and thus more scope for overvaluation.

Keywords: Miller’s theory • breadth of corporate bond fund ownership • corporate bond return predictability • short-sale constraints • divergence of opinions

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 (April 1, 2023). Management Science, Forthcoming, 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 ( email )

740 Garden Road
236G
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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