Corporate Bond Credit Spreads and Forecast Dispersion

53 Pages Posted: 21 Mar 2006 Last revised: 1 Mar 2010

See all articles by Levent Guntay

Levent Guntay

Federal Deposit Insurance Corporation (FDIC)

Dirk Hackbarth

Boston University - Department of Finance & Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: February 18, 2010

Abstract

Recent research establishes a negative relation between stock returns and dispersion of analysts’ earnings forecasts, arguing that asset prices more reflect the views of optimistic investors because of short-sale constraints in equity markets. In this article, we examine whether a similar effect prevails in corporate bond markets. After controlling for common bond-level, firm-level, and macroeconomic variables, we find evidence that bonds of firms with higher dispersion demand significantly higher credit spreads than otherwise similar bonds and that changes in dispersion reliably predict changes in credit spreads. This evidence suggests a limited role of short-sale constraints in our corporate bond data sets. Consistent with a rational explanation, dispersion appears to proxy largely for future cash flow uncertainty in corporate bond markets.

Keywords: Analyst forecasts, Corporate bonds, Credit risk, Earnings volatility

JEL Classification: G12, G32, G33

Suggested Citation

Guntay, Levent and Hackbarth, Dirk, Corporate Bond Credit Spreads and Forecast Dispersion (February 18, 2010). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891698 or http://dx.doi.org/10.2139/ssrn.891698

Levent Guntay (Contact Author)

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States
202-8986819 (Phone)

Dirk Hackbarth

Boston University - Department of Finance & Economics ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)

HOME PAGE: http://people.bu.edu/dhackbar/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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