Asset Growth Anomaly of Corporate Bonds: A Decomposition Analysis
58 Pages Posted: 23 Nov 2021 Last revised: 19 Apr 2022
Date Written: November 21, 2021
The asset growth anomaly, an inverse relationship between security performance and asset growth rates, prevails not only in the equity market but also in the corporate bond market. This can be either interpreted as a risk and return tradeoff where bonds of higher asset growth firms are better collateralized, lowering default risk and expected return, or a mispricing where investors over-extrapolate the past growth and underestimate default probabilities of high asset growth issuers which drive a poorer realized return. To differentiate, we decompose bond performance to yields and yield change based performance. We find that bonds issued by higher asset growth firms have lower initial yields, consistent with the expected return explanation in the first place. However, aligned with the mispricing explanation, we find yield spreads of these bonds, non-investment grade bonds in particular, rise in the subsequent year. We confirm the mispricing interpretation using tests involving the 2010-2014 Fed's quantitative easing program and intergrating bond performance with investor sentiment.
Keywords: Bond return; Credit risk; Mispricing; Asset growth; Bond collateral
JEL Classification: G11; G22
Suggested Citation: Suggested Citation