Issuer quality and the credit cycle
By: Robin Greenwood, Samuel G. Hanson
Contributors: Hanson, Samuel (Samuel Gregory); Harvard Business School
Series: Working paper / Harvard Business School -- 11-065; Working paper (Harvard Business School) -- 11-065
Publisher: Harvard Business School
Published: 2011
Place of publication: Boston]
Language: eng
Number of pages: 45
Description: We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns.
Notes: "January 2011, revised June 2011" -- Publisher's website.

"June 2011 (First draft: September 2010)" -- added t.p.

Includes bibliographical references.