How does the corporate bond market value capital
investments and accruals?
Sanjeev Bhojraj Æ Bhaskaran Swaminathan
Published online: 29 November 2007
Ó Springer Science+Business Media, LLC 2007
Abstract This paper examines whether the mispricing of accruals documented in
equity markets extends to bond markets. The paper ﬁnds that corporate bonds of
ﬁrms with high operating accruals underperform corporate bonds of ﬁrms with low
operating accruals. In the ﬁrst year after portfolio formation, the underperformance
is 115 basis points using an accrual measure that includes capital investments and 93
basis points using an accrual measure that is based only on working capital
investments. The Sharpe ratios of the zero-investment bond accrual portfolios are
comparable to those of the corresponding zero-investment stock accrual portfolios.
The results are also robust to risk adjustments based on both a factor model con-
sisting of the Fama and French (J. Financial Econ 33 (1993) 3) stock and bond
market factors and a characteristics model based on bond ratings and duration.
Cross-sectional Fama–MacBeth regressions that use individual bond data and
control for stock and bond issuances in addition to ratings and duration also conﬁrm
the time-series portfolio ﬁndings. Overall, our results reveal an accrual anomaly
among bonds similar to that observed among stocks.
Keywords Bonds Á Accruals Á Mispricing Á Market efﬁciency
JEL Classiﬁcations G12 Á G14 Á M41
S. Bhojraj (&) Á B. Swaminathan
Cornell University, Ithaca, NY 14850, USA
Rev Account Stud (2009) 14:31–62