Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns

WBS Finance Group Research Paper

Posted: 11 Oct 2020 Last revised: 1 Sep 2022

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)

Yoshio Nozawa

University of Toronto

Multiple version iconThere are 3 versions of this paper

Date Written: August 19, 2020

Abstract

A corporate bond’s book value divided by its market price strongly predicts its return from actual transactions occurring at least eight days after observing the signal. Bonds with the 20% highest “bond book-to-market ratios” outperform their lowest quintile counterparts by 3%-4% per year, other things equal. The finding controls for numerous attributes tied to liquidity, default, microstructure, and priced asset risk, including yield, credit spread, structural model equity hedges, bond rating, and maturity. If an efficient markets story explained the 3%-4% spread, we would not observe (as we do) rapid decay in the ratio’s predictive efficacy with implementation delays beyond one month, efficacy across the bond-type spectrum, and an inability of microstructure, factor risk, and bond attributes to account for the anomaly.

Keywords: Credit Risk, Corporate Bonds, Book-to-Market, Market Efficiency, Transaction Costs, Point-in-Time

JEL Classification: G11, G12, G14

Suggested Citation

Bartram, Söhnke M. and Grinblatt, Mark and Nozawa, Yoshio, Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns (August 19, 2020). WBS Finance Group Research Paper, Available at SSRN: https://ssrn.com/abstract=3679755 or http://dx.doi.org/10.2139/ssrn.3679755

Söhnke M. Bartram (Contact Author)

University of Warwick ( email )

Warwick Business School
Finance Group
Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1098 (Phone)
310-206-5455 (Fax)

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yoshio Nozawa

University of Toronto ( email )

105 St George St
Toronto, ON M5S3E6
Canada
3013125569 (Phone)

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