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Cash flow volatility and corporate bond yield spreads

Author

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  • Alan Douglas
  • Alan Huang
  • Kenneth Vetzal

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. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Alan Douglas & Alan Huang & Kenneth Vetzal, 2016. "Cash flow volatility and corporate bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 417-458, February.
    • Handle: RePEc:kap:rqfnac:v:46:y:2016:i:2:p:417-458
    DOI: 10.1007/s11156-014-0474-0
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    Citations

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    Cited by:

    1. Ge Bai & Daniel Jiménez & Phillip Phan & Luis E. Quintero & Alessandro Rebucci & Xian Sun, 2021. "The Financial Fragility of For-profit Hospitals: Evidence from the COVID-19 Pandemic," NBER Working Papers 29388, National Bureau of Economic Research, Inc.
    2. Han-Hsing Lee, 2020. "Distress risk, product market competition, and corporate bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1093-1135, October.
    3. Sudip Datta & Anand Jha & Manoj Kulchania, 2020. "On accounting’s twenty-first century challenge: evidence on the relation between intangible assets and audit fees," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 123-162, July.
    4. Zhao, Hong & Shen, Hao & Wang, Haizhi & Zhu, Yun, 2024. "State corporate tax changes and bond pricing: U.S. evidence," International Review of Financial Analysis, Elsevier, vol. 92(C).
    5. Wang, Chih-Wei & Lee, Chien-Chiang & Wu, Lin-Tan, 2023. "The relationship between cash flow uncertainty and extreme risk: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    6. Wu, Wei-Shao & Fok, Robert C.W. & Chang, Yuanchen & Chen, Chao-Jung, 2022. "Credit default swaps and corporate performance smoothing," Journal of Corporate Finance, Elsevier, vol. 75(C).
    7. Ali Nejadmalayeri & Subramanian Rama Iyer & Manohar Singh, 2017. "Is there an optimally diversified conglomerate? Gleaning answers from capital markets," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 117-158, July.
    8. Tsung-Kang Chen & Hsien-Hsing Liao & Wen-Hsuan Chen, 2017. "CEO ability heterogeneity, board’s recruiting ability and credit risk," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1005-1039, November.
    9. Tsung-Kang Chen & Hsien-Hsing Liao, 2018. "Suppliers’/customers’ production efficiency uncertainty and firm credit risk," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 519-560, February.
    10. James W. Bannister & Harry A. Newman & Emma Y. Peng, 2020. "Top management tournament incentives and credit ratings," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 769-801, August.
    11. Ahmed, Mohamed Shaker & Elnahass, Marwa, 2024. "Being famous matters: Evidence from cash flow volatility," International Review of Financial Analysis, Elsevier, vol. 93(C).

    More about this item

    Keywords

    Corporate bond yield spreads; Cash flow volatility; Equity return volatility; Information recency; G11; G12;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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