Macroeconomic and Institutional Determinants of Domestic Corporate Bond Yield Spread in Nigeria

On paper, the coupon on corporate bonds is simply seen as the risk-free rate plus a spread, but in reality, the empirical analysis of the determinants of the spreads is highly demanding. Unmasking the determinants of corporate bond yield spreads has remained an important research issue. In Nigeria, there seems to be dearth of research into this area of corporate spreads due to insufficient bond data. Even in the advanced economies where studies have been carried out, there seems to be no universally accepted determinants of corporate bonds yield spread: different variables and proxies are used in different studies. Other identified research problems include the measurement of the variables used in the studies. This study investigates the extent to which macroeconomic and institutional factors affect corporate bonds yield spread in Nigeria. It applies the random effects model on an unbalanced firm-level panel data from 2000 to 2014 to examine the determinants of domestic corporate bonds yield spread in Nigeria. We find that domestic corporate bonds yield spread responded to macroeconomic and institutional factors in Nigeria at the 1 per cent level of significance. The significance of the individual explanatory variables, with the control variables, was maintained, at the 5 per cent level for interest rate volatility and sovereign risk. The outcome of the study is consistent with most of the studies conducted with secondary market data on corporate bonds in the advanced economies, and so, justifies our use of inflation-adjusted coupons on bonds as the yield on corporate bonds. We therefore recommend that government should work hard to strengthen her institutional framework, as well as enhance the deepening of the financial market in order to assisting in narrowing corporate credit spreads. Researchers should also not shy away from using inflation-adjusted coupons as proxy for corporate bonds yield spread.