Retail Bond Investors and Credit Ratings

66 Pages Posted: 28 Jun 2021 Last revised: 26 Apr 2023

See all articles by Ed deHaan

Ed deHaan

Stanford Graduate School of Business

Jiacui Li

David Eccles School of Business, University of Utah

Edward M. Watts

Yale School of Management

Date Written: June 22, 2021


Using comprehensive data on U.S. corporate bond trades since 2002, we find evidence that retail bond investors overrely on untimely credit ratings to their financial detriment. Specifically, they appear to select bonds by first screening on a credit rating and then sorting by yield, buying the highest-yielding bonds within each rating level. Because yields lead credit rating changes, selecting on yield-within-rating means that retail investors systematically trade in the opposite direction of changing fundamentals, buy in advance of credit downgrades and defaults, and materially underperform a diversified portfolio. Our study provides new evidence of ill-informed retail trading in a market that is thought to be relatively sophisticated, corroborates regulators' concerns about investor overreliance on credit ratings, and contributes to the academic literature on the roles and consequences of credit ratings in debt markets.

Keywords: Credit ratings, Retail investors, Fundamental investing, Investor sophistication, Behavioral finance

JEL Classification: M41, G11, G12, G14, G40

Suggested Citation

deHaan, Ed and Li, Jiacui and Watts, Edward, Retail Bond Investors and Credit Ratings (June 22, 2021). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: or

Ed DeHaan

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Jiacui Li

David Eccles School of Business, University of Utah ( email )

HOME PAGE: http://

Edward Watts (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

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