De Facto Seniority, Credit Risk, and Corporate Bond Prices

We study the effect of a bond’s place in its issuer’s maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers’ maturity structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evide...

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Bibliographic Details
Published in:The Review of financial studies 2017-11, Vol.30 (11), p.4038-4080
Main Authors: Bao, Jack, Hou, Kewei
Format: Article
Language:English
Subjects:
Bond markets
Corporate bonds
Credit risk
Maturity
Motivation
Prices
Securities prices
Seniority
Studies
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Summary:We study the effect of a bond’s place in its issuer’s maturity structure on credit risk. Using a structural model as motivation, we argue that bonds due relatively late in their issuers’ maturity structure have greater credit risk than do bonds due relatively early. Empirically, we find robust evidence that these later bonds have larger yield spreads and greater comovement with equity and that the magnitude of the effects is consistent with model predictions for investment-grade bonds. Our results highlight the importance of bond-specific credit risk for understanding corporate bond prices.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhx082