De Facto Seniority, Credit Risk, and Corporate Bond Prices
Forthcoming, Review of Financial Studies
67 Pages Posted: 8 Sep 2017
Date Written: September 7, 2017
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.
Keywords: Credit Risk, Structural Models of Default, Comovement, Corporate Bonds
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation