Journal of Finance Vol. 62 No. 1 2007

Corporate Yield Spreads and Bond Liquidity

Long Chen^1,2,3,4,5; David A. Lesmond^1,2,3,4,5; Jason Zhanshun Wei^6,7

¹ Tulane University · ² Louisiana State University · ³ University of New Orleans · ⁴ Michigan State University · ⁵ Social Sciences and Humanities Research Council · ⁶ Conference Board · ⁷ Electronic Sensor Technology (United States)

Abstract

We find that liquidity is priced in corporate yield spreads. Using a battery of liquidity measures covering over 4,000 corporate bonds and spanning both investment grade and speculative categories, we find that more illiquid bonds earn higher yield spreads, and an improvement in liquidity causes a significant reduction in yield spreads. These results hold after controlling for common bond‐specific, firm‐specific, and macroeconomic variables, and are robust to issuers' fixed effect and potential endogeneity bias. Our findings justify the concern in the default risk literature that neither the level nor the dynamic of yield spreads can be fully explained by default risk determinants.

DOI

10.1111/j.1540-6261.2007.01203.x

Volume

62

Issue

1

Pages

119-149

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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