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Which Factors Affect Corporate Bond Pricing? Evidence from Eurobonds Primary Market Spreads

by Andrea Sironi of Bocconi University, and
Giampaolo Gabbi of the Universita di Siena

September 2002

Abstract: The question of which factors are relevant in determining corporate bonds pricing is empirically investigated by analyzing the issuance spreads of Eurobonds completed by Canadian, European, Japanese and US. Companies during the 1991-2001 eleven year period. A unique dataset of spreads, ratings and other relevant bond variables is used for a sample of 3,403 eurobonds issues. Four main results emerge from the empirical analysis. First, the ratings of corporate bonds are the most important determinant of spreads between the yield to maturity of bonds and that of equivalent Treasury securities. Second, bond investors' reliance on rating agencies judgments has increased over time during the sample period. Third, while a bond's expected tax treatment represents a relevant factor explaining spreads cross-sectional variability, the primary market efficiency and the expected secondary market liquidity appear as poor explanatory variable. Finally, empirical evidence shows that rating agencies adopt a different, "through the cycle", evaluation criteria of obligor's creditworthiness with respect to the forward looking one adopted by bond investors.

JEL Classification: G12, G14, G15.

Keywords: Eurobonds, credit ratings, spreads, default risk, bonds.

Published in: European Journal of Finance, Vol. 11, No. 1, (February 2005), pp. 59-74.

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