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Reaching for yield, which we define as an investor preference for higher-yield bonds at a given rating or for higher-rated bonds at given yields, is associated with inflated valuation and thus negatively predicts risk-adjusted returns. Controlling for ratings, alphas are lower for higher-yield bonds, whereas, controlling for yields, alphas are lower for safer-looking, higher-rated bonds. Future bond returns are particularly low when current interest rates are low and demand from yield-reaching investors increases. These bonds experience more frequent downgrades and defaults, suggesting that they are riskier despite their high valuation. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The e-companion and data are available at https://doi.org/10.1287/mnsc.2023.4920. [ABSTRACT FROM AUTHOR]

Using samples of corporate bonds issued by Chinese A-share firms from 2014 to 2021, we examine whether information about bond defaults transmits to other bonds underwritten by a common underwriter. We document that during the underwriting process for a new corporate bond, if any prior bonds underwritten by the same underwriter have defaulted, the yield spread of the new corporate bond increases significantly. Specifically, such a new bond, on average, has a yield spread that is 16.8 basis points higher than one without a common underwriter. The results suggest that investors perceive the default risk of a new bond increases due to a deteriorated reputation of the underwriter. Additional analyses suggest that the adverse effect of the new bond yield spread is less salient when an underwriter has a strong reputation, is state-owned, or has foreign shareholding; the issuer is state-owned or dual listed overseas. Overall, default information in the bond market transmits through common underwriters. [ABSTRACT FROM AUTHOR]

Green bonds have become a vital financial instrument to promote green development globally in the face of various environmental challenges. This paper investigates the impact of China's A-share listed companies' green bond issuance on ESG performance and the potential mechanisms from 2011–2021, using propensity score matching and double difference method (PSM-DID). The study finds that green bonds improve corporate ESG performance by enhancing environmental information disclosure, encouraging green innovation, and improving green reputation. Moreover, heavily polluting industries benefit more from green bond issuance in terms of ESG performance improvement. These findings contribute to understanding the benefits of green bond market in developing countries. [ABSTRACT FROM AUTHOR]

By exploiting the first public bond default event in China—the Chaori bond default in 2014—we examine how implicit government guarantees shape the role of media information in bond pricing. We find an insignificant association between preissuance media tones and bond issuances' yield spreads before the event; however, the association becomes negative and significant after the event. The role of media tone in bond pricing is more pronounced for regions with greater information demand for default risk and for media outlets with stronger information provisions toward implicit government guarantees after the event. Mechanism analyses suggest increased bond investors' risk awareness, rather than strengthened information provisions in media tones, as the force behind the more pronounced role of media tone in bond pricing. Finally, lower yield spreads driven by more positive media tone do not suggest bond overpricing. Our study reveals the role of media tone in bond pricing and displays the evolution of the media tone's role in bond pricing due to changing institutions. [ABSTRACT FROM AUTHOR]

With systematic reinvestment of the cash flows generated by a bond portfolio, investors can modify their portfolios' exposure to different risk factors. They can also use this mechanism to design a flexible, smooth, yet low-cost strategy—a "glidepath"—to direct their portfolios toward their medium- and long-term objectives. Focusing on climate objectives, we introduce net-zero glidepaths (NZGps) and show how bondholders can devise NZGp portfolios that are consistent with their security-selection processes and compliant with their financial mandates. We present possible solutions for NZGps for two of the largest groups of corporate-bond investors: buy-and-hold and index-following investors. The simulated NZGp portfolios achieved their interim net-zero emission targets with a relatively small impact on their performance. They also remained compliant with the financial constraints, including duration and income targets, credit allocations, and issuer and sector concentrations. [ABSTRACT FROM AUTHOR]

We investigate the relation between sovereign and corporate bond issuance. Sovereign bond issues that increase a country's maximum maturity are followed by increases in the maximum maturity of corporate issues. Our results point to issuance complementarities based on the benchmarking of corporate bonds to sovereign bonds. Sovereign and corporate bond issues are also substitutes, but substitutability requires the availability of a high-quality sovereign bond benchmark. By adding to existing theories focusing on substitutability, our findings highlight the role that the maturity of sovereign debt plays in capital market development. [ABSTRACT FROM AUTHOR]

It is well known that interest rates and credit spreads are negatively correlated. Any successful model for pricing callable corporate bonds has to take this correlation into account. A new approach for the analysis of corporate bond options is developed by using two correlated geometric Brownian motion (GBM) processes for the spread and interest rate components of corporate bond yields. Analysis of the results and comparison with market prices suggest that the traditional methods of calculating the option premium overestimate the value of the call option. Our analysis can also explain why risk neutral credit spreads are significantly wider than implied by default probability and in fact justify higher spreads. [ABSTRACT FROM AUTHOR]

International financial integration exposes countries to external shocks. This paper identifies the impact and transmission of global financial risk (GFR) shocks to emerging market economies (EMEs). Heightened GFR significantly raises EME borrowing costs and lowers equity returns, reducing domestic economic activity. We document a novel transmission channel of GFR shocks to EMEs via international capital flows. Countries experiencing larger capital inflows are more affected by GFR fluctuations. Exploring the transmission through capital flows, GFR shocks affect EMEs mainly through their effect on equity returns, instead of country spreads. We show that equity returns contain more information about EME macroeconomic fluctuations than sovereign and corporate bond spreads. [ABSTRACT FROM AUTHOR]

The high costs of disclosing confidential information lead firms with proprietary information to prefer private debt (bank loan) to public debt (corporate bond). We provide empirical evidence supporting this proposition using the staggered adoption of the inevitable disclosure doctrine (IDD) by US state courts that exogenously increased the value of proprietary information. The focal firms are significantly less likely to issue bonds after the IDD adoption. Financing through public debt decreases more for firms in which the protection of proprietary information is relatively more important. [ABSTRACT FROM AUTHOR]

Little is known about how executive gender shapes the inherent conflict of interest between shareholders and bondholders. Using a sample of almost 100,000 unique bond‐year observations, this study investigates how the appointment of female chief executive officers (CEOs) lowers the default outlook. Our evidence indicates that bond yield and bond volatility are significantly lower after a female takes the helm at a firm. This executive gender effect remains highly statistically and economically significant across various robustness checks and after addressing endogeneity concerns. Female CEOs lower the default risk component of the bond yield but have no material impact on the liquidity component. Subsample analysis substantiates the conditional effect of female CEOs on bond yield and bond volatility. Our evidence indicates that female CEOs' risk‐averse attributes pass through the credit risk and information asymmetry channels. [ABSTRACT FROM AUTHOR]

This study investigates the determinants of trading activity in the U.S. corporate bond market, focusing on the effects of Seasonal Affective Disorder (SAD) and macroeconomic announcements. Employing the General-to-Specific (Gets) Autometrics methodology, we identify distinct behavioral responses between retail and institutional investors to SAD, noting a significant impact on retail trading volumes but not on institutional trading or bond returns. This discovery extends the understanding of behavioral finance within the context of bond markets, diverging from established findings in equity and Treasury markets. Additionally, our analysis delineates the influence of macroeconomic announcements on trading activities, offering new insights into the market's reaction to economic news. This study's findings contribute to the broader literature on market microstructure and behavioral finance, providing empirical evidence on the interplay between psychological factors and macroeconomic information flow within corporate bond markets. By addressing these specific aspects with rigorous econometric techniques, our research enhances the comprehension of trading dynamics in less transparent markets, offering valuable perspectives for academics, investors, risk managers, and policymakers. [ABSTRACT FROM AUTHOR]

This study examines the performance of worldwide corporate sustainability bonds issued from 2014 to 2020. Unlike traditional bonds, the proceeds of sustainability bonds are utilised for financing projects to bring about environmental and socio‐economic benefits. We analyse the short‐term market reaction to announcements of sustainability and traditional bond issuance and document that the stock market reaction to an announcement of sustainability bonds is stronger than that for traditional bonds. We also find that multiple issuers of sustainability bonds achieve a more favourable market reaction than single issuers. Finally, we examine if environmental, social and governance (ESG) scores can positively and significantly impact the corporate performance of firms through the lens of sustainability bond issuances. We find that ESG scores are the primary performance drivers for firms, and the effect is more pronounced for firms that issue sustainability bonds. Overall, the results suggest that issuers of sustainability bonds show their commitment towards environmental and societal goals and thus benefit from favourable stock market reactions. [ABSTRACT FROM AUTHOR]

Proponents of quantitative easing (QE) unconventional policy have rather overstated some evidence that structural time series models do not predict long‐term asset prices and yields as well as naive random walk forecasts, implying that predictions of price reversals cannot be profitable and, therefore, that QE effects are not transitory. Indeed, in this work we present evidence that naive models do not outperform structural vector autoregressive and Markov switching models in out‐of‐sample forecasting of corporate bond yields purchased by the European Central Bank, when the information set includes base money growth. It turns out that structural time series models provide additional information regarding the likelihood of price reversals, thus motivating investors to offset the effects of QE interventions if they perceive unconventional monetary policy regimes as temporary. [ABSTRACT FROM AUTHOR]

The relationship between ESG performance and equity returns has become a popular area of research, but the same is not yet the case for bond returns. In this paper, we explore whether incorporating ESG factors, beyond emissions into the bond portfolio investment process leads to under or out performance. We find that ESG investing in bond portfolios does not lead to over or under performance. In other words, you do not have to 'pay to do good'. Further, in the period since the Paris agreement, Energy sector bond portfolio returns are positively related to ESG factors. This finding aligns with the theoretical prediction of Pedersen, Fitzgibbons, and Pomorski (2020), namely, that the ESG-return relationship should become positive as investors become more aware of ESG risks and opportunities. Overall, we show that Bond investors can 'do well while doing good'. [ABSTRACT FROM AUTHOR]

We examine the determinants of and investor responses to corporate environmental, social, and governance (ESG) bond issuance in Korea. We find that ESG bond issuance is positively associated with firm size and foreign ownership stakes. We also find that firms that establish ESG committees at the board level and those that are subject to carbon emission trading system are more likely to issue ESG bonds. Unlike prior studies that analyze green bond issuance in developed markets and China, we find no significant stock market reaction to ESG bond issuance in Korea, suggesting that the signaling effect of ESG bonds-in which companies credibly signal their commitment to ESG by issuing ESG bonds-does not exist. This paper suggests that enhanced ESG bond standards, post-issuance reporting, and verification procedures are needed in the Korean ESG bond market. [ABSTRACT FROM AUTHOR]

Public sector corruption affects economic and financial outcomes, such as GDP growth, foreign direct investment, and government funding costs. Less is known about the spillovers from perceptions of public sector corruption on the private sector corporate bond market. In this paper, we assess the role of public sector corruption perception on corporate bond market variables in Europe using data of both country-level corporate bond indexes and firm-level corporate bond market issuances. At the aggregate country level, we find some evidence that country indices of corporate bonds' yields and coupons are higher in countries with more corruption. While we do not find effects of corruption on coupon rates at the individual firm level, we show that higher government corruption perception increases their yield to maturity and reduces the amounts raised by corporations through their bond issuances. [ABSTRACT FROM AUTHOR]

Existing studies generally recognize the critical role played by macro monetary policy, of which the uncertainty will increase corporate bond issuance premiums at a micro level. However, relatively little is known about these relationships from the perspective of non-financial information in the corporation. So this study sets out to do further exploration. We use the database to obtain information, including the bond issuance of A-share listed corporations in China from 2015 to 2020. The findings suggest that high environmental, social, and governance (ESG) ratings from listed corporations significantly weaken the positive correlation between monetary policy uncertainty and bond issuance premiums. Specifically, it has a positive information pricing effect on China's primary debt issuance market, as well as a mitigating impact on macro-financial policy risk. We also find, through further mechanistic studies, that ESG ratings are more helpful in undermining the impact of monetary policy uncertainty on bond issuance premiums in the context of higher financial information quality. Our findings are conducive to enriching the research framework of the economic consequences of ESG ratings, meaningfully influencing the growing literature that exposed the mechanism of bond issuance premiums, and further, verifying the interaction of information at different levels (macro vs micro) in asset pricing. [ABSTRACT FROM AUTHOR]

Using a comprehensive dataset of Italian small and medium-sized enterprises, we find that differences between private and public information on firm creditworthiness affect the decision to issue bonds. Our evidence supports favorable (rather than adverse) selection in corporate bond markets. Specifically, holding public information constant, firms with better private fundamentals are more likely to access bond markets. These effects are weaker for opaque firms and stronger for firms with worse publicly observable risk. Additionally, credit conditions improve for issuers following the bond placement, compared with a matched sample of non-issuers. This is consistent with a model where banks offer more flexibility than markets during financial distress and firms use market lending to signal credit quality to outside stakeholders. [ABSTRACT FROM AUTHOR]

Purpose: This paper aims to investigate the long-run financial and environmental performance of corporate green bond issuers, worldwide. Design/methodology/approach: The data includes 259 corporate green bond issuers from 2013 to 2020. The authors adopt the matching approach, using the nearest neighbor method to select the control firms. The event-time approach is used to examine corporate green bond issuers' long-run stock market performance, and robustness tests are conducted using the calendar-time method. The authors examine green bond issuers' long-run environmental performance and carbon dioxide (CO2) emissions using difference-in-differences estimations. Findings: In contrast with the earlier long-run event studies, our results reveal that multiple-time issuers, and issuers operating in industries where the natural environment is financially material, perform financially in the long term relative to the control firms. The authors also document that corporate green bond issuers reduce their CO2 emissions, and improve their resource use efficiency and environmental performance, in the long run. Originality/value: To the authors' knowledge, this is the first study that looks at the long-run effect of corporate green bond issuance on firms' stock market performance. It has the particularity to document that corporate green bond issuance is beneficial for investors and positively affects the environment. Our findings help us understand that firms do not issue green bonds for greenwashing. [ABSTRACT FROM AUTHOR]

This paper selects the data of corporate bond from 2005 to 2019, then divides them into long term bond and short term bond according to maturity of bond. Climate risk is found have significant impact on long term bond yield. Climate risk has no significant impact on short term bond yield. Callability has significant effect on both long term and short term bond yield, while callability has large effect on short term bond and relatively small effect on long term bond. The resale has significant effect on both long term and short term bond yield. The significant effect of the resale on short term bond yield explains large part of the short term bond yield. Issuance has significant impact on both long term and short term bond, with larger impact on short term bond yield. Maturity has significant effect on the yield of both long term and short term bond, and the effect is larger for short term bond. Bearish sentiment is negatively and significantly related to long term bond yield, but has no significant effect on short term bond yield. Credit ratings have large impact on long term bond yield and explain large part of this. However, credit ratings have no significant effect on short term bond yield. [ABSTRACT FROM AUTHOR]

This paper documents that in distress periods, liquidity constrained investors sell liquid corporate bonds and hold onto illiquid ones, a phenomenon which we refer to as flight from liquidity. Performing within issuer‐time analysis to properly control for credit risk, we find that flight from liquidity results in a decline in the liquidity premium. In other words, liquid bonds that are significantly more expensive in normal market conditions, lose more value in distress periods and trade at a closer, and sometimes at an indistinguishable, yield spread to their illiquid peers from the same issuer. We also find that these shocks to the liquidity premium are short‐lived and do not have a long‐lasting pricing impact. We provide suggestive evidence that the liquidity clientele effect derives these results. Our findings suggest that investment exposure to liquid bonds entails a unique risk arising during periods of distress. [ABSTRACT FROM AUTHOR]

Using the structural approach to derive tax-adjusted duration for defaultable bonds under stochastic interest rate process, we thoroughly investigate the effects of personal taxes, default risk, and their interaction on bond duration. The simulation results show that default risk reduces duration, while personal taxes increase duration. Premium amortization and discount accretion further enhance the positive impact of personal taxes on duration. The interactive effect of default risk and personal taxes on duration depends on which effect dominates. Also, the tax effect on duration changes with bond features, bond issuers' debt policy, and interest rate level. Our empirical results validate the positive tax effect on duration by showing that duration of corporate bonds is significantly longer than that of municipal counterparts with the same credit rating, coupon rate, and maturity. Our study provides timely information on how to accurately measure interest rate risk under the current circumstance that interest rate is increasing substantially from the low level and personal taxes are expected to increase. [ABSTRACT FROM AUTHOR]

Demand for sustainable fixed-income investment solutions is surging but there is hardly research on the impact of sustainability on the risk characteristics of fixed-income portfolios. This study examines the impact of sustainability on the credit risk exposure of corporate bond portfolios between 2013 and 2020 by analyzing the returns of sustainable and non-sustainable portfolios using two different asset pricing models and environmental, social, and governance (ESG) ratings from different providers. Controlling for a set of portfolio characteristics, our results show that sustainable portfolios are significantly less exposed to credit risk than their non-sustainable peer portfolios. This finding implies that considering ESG criteria in portfolio management is a suitable means to systematically manage credit risk. Being the first study to investigate the relationship between sustainability and credit risk on a portfolio level, this study contributes to the understanding of the effects of ESG criteria in portfolio management and provides academics and investment professionals with valuable insights. [ABSTRACT FROM AUTHOR]

This article examines the relationship between corporate social responsibility (CSR) activities and bond return volatility. While previous research has focused on the impact of CSR on equity markets and stockholders, there is limited research on its effect on debt markets and bondholders. The study finds a strong positive relationship between corporate social performance and bond return volatility. The impact of CSR strengths and concerns on bond return volatility is also examined, with CSR strengths having a greater effect. Additionally, the study finds that CSR spending is associated with higher tax avoidance and managerial risk-taking, which further increases bond return volatility. Overall, the findings suggest that a firm's social engagement increases the risk associated with its bonds, potentially leading to higher return volatility. [Extracted from the article]

Purpose: This study aims to explore the failures of Tunisian secondary corporate bond market liquidity to understand the determinants of corporate bond market liquidity at large. Design/methodology/approach: We adopted a qualitative approach to studying the Tunisian Stock Exchange. Dealers' perceptions were collected through semi-structured face-to-face interviews; the data was recorded, transcribed and thematically analysed. Findings: Secondary corporate bond market failures are due, in part, to microstructural choices – especially the use of an over-the-counter market as a trading venue. The absence of a corporate bond yield curve, a narrow investor base, market participants' lack of financial education and authorities' attitudes are equally responsible. Research limitations/implications: This study is useful to researchers, policymakers and practitioners, as it identifies microstructural and other factors affecting the Tunisian secondary corporate bond market. We interviewed only Tunisian dealers while ignoring other categories of market participants. Furthermore, a focus group discussion could have improved our understanding of the determinants of the Tunisian secondary corporate bond market. Originality/value: This paper aimed to qualitatively discuss several issues related to the Tunisian secondary corporate bond market. To date, little academic research has addressed this topic in the illiquid and non-transparent corporate bond markets. [ABSTRACT FROM AUTHOR]

With the aim of effectively preventing and controlling systemic risk, by stimulating the advancement of the green bond market, it is significant and imperative to help investors and policymakers adopt more effective measures, which will ensure them to maximize profit. We construct VAR, DCC-GARCH and Copula-CoVaR models, and study the spillover effect between the green bond market and traditional bond market from the three perspectives of mean spillover, volatility spillover and extreme risk spillover using the data on daily closing prices of green bond market and traditional bond market indices. The research findings of this paper are as follows: (1) There are three spillover effects of mean value, volatility and extreme risk among the green bond market, corporate bond market, enterprise bond market and conventional bond market. (2) From the perspective of mean spillover between markets, only the mean spillover between the conventional bond market and the green bond market is bidirectional, and there is the profoundest impact of spillover from the green bond market to the conventional bond market. (3) As far as the volatility spillover between markets is concerned, the volatility spillover between the three traditional bond market and the green bond markets are all positive. The volatility spillover between the conventional bond market and the green bond market is the largest, which is particularly obvious in the first half of 2018 and the first half of 2020. (4) In terms of inter-market extreme risk spillover, the risk spillover between the green bond market and the traditional bond market is positive. The green bond market contributes more to the risk spillover of the enterprise bond market, and it has a time-varying risk spillover effect on the traditional bond market. [ABSTRACT FROM AUTHOR]

Consider the optimal allocation between money market account and corporate bond fund. While the money market account is free of credit risk, corporate bonds are defaultable and exhibit long-range dependence (LRD) in credit risk. We propose a Volterra default intensity model to capture the LRD in credit risk. Using utility maximization, we derive the novel optimal investment strategy for a corporate bond fund. As empirical study shows that the COVID-19 pandemic has lowered the level of LRD in credit risk, we conduct sensitivity analysis and empirically investigate the changes in demand for corporate bonds before and during the pandemic period. [ABSTRACT FROM AUTHOR]

We study whether and how insider sales affect a firm's bond yield spreads. By examining insider sales and corporate bond yield spreads from 2011 to 2022 in the Chinese market, we find robust evidence that insider sales have a significant and important impact on corporate bond yield spreads. A one-standard-deviation increase in insider sales resulted in an increase of 11.82 bps in corporate bond yield spread. Further analysis suggests that while both the information asymmetry channel and the tunneling channel exist, bond investors do not believe that excess return from insider sales would reduce fund occupancy and alleviate default risk. We also find that ownership structure matters for the impact of insider sales on corporate bond yield spreads, where insiders in firms with more concentrated ownership structures tend to tunnel or withhold private information, whereas a more balanced ownership has the opposite effect. There is also weak evidence that the impact of insider sales on corporate bond yield spreads is larger in private firms than in state-owned ones. In addition, institutional investor ownership weakens the role of insider sales in bond pricing and, in particular, weakens the response of bond investors to insider sales in private firms. [ABSTRACT FROM AUTHOR]

Prior studies document the role social media information plays in the stock market and the important dissimilarities between the bond and stock markets. Bridging these two types of literature, we examine the role of social media information in the corporate bond market. Analyzing a broad sample of messages by Twitter individual users, posted just prior to earnings announcements, containing bond, credit risk, and fundamental information, we find that aggregate Twitter opinion (OPI) predicts upcoming announcement bond returns and changes in credit default swap (CDS) spreads, and is associated with future changes in bond yield spreads and credit ratings, thereby providing economically important information to the bond market. This interpretation is bolstered by results from a variety of cross-sectional analyses. Finally, we document an association between OPI and future changes in default risk, which casts light on the nature of the Twitter information underlying our findings. Overall, our findings demonstrate that Twitter appears to disseminate potentially economically important information to even the presumably sophisticated bond and CDS investors, as well as information intermediaries. This paper was accepted by Suraj Srinivasan, accounting. Funding: P. Mohanram acknowledges financial support from the Social Sciences and Humanities Research Council (SSHRC) of Canada. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4589. [ABSTRACT FROM AUTHOR]

The current study explores the problem of illiquidity in the corporate bond market globally and proposes a solution to enhance liquidity by studying various dimensions of liquidity. Purpose: The purpose of this paper is to propose a solution to the global issue of illiquidity in the corporate bond market. The problem has been identified by many researchers and this paper attempts to find a viable solution in the "fungibility route" as an alternative to the "liquidity route". Design/Methodology: An analysis of a sample size of 234,772 trade data of corporate bonds and a sample size of 2,00,607 trade data of G-securities is performed to identify the problem. Findings/Solution proposed: A mathematical model based on the credit risk differential and sensitivity differential is proposed to find out the fair value at which an illiquid bond can be exchanged with a liquid bond. To arrive at the fair value of the illiquid bond, we have calculated the risk-adjusted yield (RAY) using the modified duration and a credit risk differential. Originality: This research is a pioneering effort in addressing the worldwide issue of corporate bond illiquidity by proposing a novel solution. The proposed strategy aims to improve the liquidity of the bond indirectly, by utilizing the fungibility route. [ABSTRACT FROM AUTHOR]

Using a proprietary database of corporate green bonds issued in China, we investigate the effect of green bond issuance on firm‐level carbon performance and its impact mechanism. We utilize the Economic Input–Output Life Cycle Assessment (EIO‐LCA) to evaluate corporate carbon performance and use all the 1074 firms that issued corporate bonds in 2009–2018 as the sample group. The empirical results reveal that the companies did not effectively achieve the expected carbon performance improvement post‐issuance. The mechanism analysis suggests that this might have been because the primary motivation for the companies to issue green bonds is to ease their financial constraints. Environmental regulations (at the national and industrial level) play a positive role in the relations between corporate green bond issuance and carbon performance. Overall, the findings raise an alert on the value of Chinese corporate green bonds in climate change mitigation and indicate the need for information disclosure and carbon performance‐linked supervision on green bond issuers. [ABSTRACT FROM AUTHOR]