Asset Growth Anomaly of Corporate Bonds: A Decomposition Analysis

58 Pages Posted: 23 Nov 2021 Last revised: 19 Apr 2022

See all articles by Fang Chen

Fang Chen

University of New Haven

Yifei Li

University of Nevada Reno

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: November 21, 2021

Abstract

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

Chen, Fang and Li, Yifei and Wu, Wenfeng and Yu, Tong, Asset Growth Anomaly of Corporate Bonds: A Decomposition Analysis (November 21, 2021). Available at SSRN: https://ssrn.com/abstract=3968682 or http://dx.doi.org/10.2139/ssrn.3968682

Fang Chen

University of New Haven ( email )

300 Boston Post Road
West Haven, CT 06516
United States

Yifei Li (Contact Author)

University of Nevada Reno

College of Business
1664 N. Virginia St
Reno, NV 89557
United States

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 1954 Huashan Road
Shanghai, Shanghai 200030
China

Tong Yu

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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