Cash flow volatility and corporate bond yield spreads

Cash flow volatility and corporate bond yield spreads We conduct a detailed empirical study of the effects of cash flow volatility on corporate bond yield spreads. We use both forward-looking and historical cash flow volatility measures. Using a large sample of transaction prices for investment grade straight bonds, we show that cash flow risk has strong statistical significance and economic effects on spreads, after controlling for a battery of factors which are known to be important determinants of spreads. The effects of cash flow risk are more pronounced for firms that are at greater risk of default, and when cash flow risk is measured based on more recent information. Our results provide empirical support to structural models of bond pricing and emphasize the effect of fundamentals-related information uncertainty on bond prices. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Cash flow volatility and corporate bond yield spreads

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-014-0474-0
Publisher site
See Article on Publisher Site

Abstract

We conduct a detailed empirical study of the effects of cash flow volatility on corporate bond yield spreads. We use both forward-looking and historical cash flow volatility measures. Using a large sample of transaction prices for investment grade straight bonds, we show that cash flow risk has strong statistical significance and economic effects on spreads, after controlling for a battery of factors which are known to be important determinants of spreads. The effects of cash flow risk are more pronounced for firms that are at greater risk of default, and when cash flow risk is measured based on more recent information. Our results provide empirical support to structural models of bond pricing and emphasize the effect of fundamentals-related information uncertainty on bond prices.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Aug 31, 2014

References

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