The Review of Asset Pricing Studies Vol. 12 No. 3 2022
Capital Structure Priority Effects in Durations, Stock-Bond Comovements, and Factor Pricing Models
Abstract
We show theoretically and empirically that the durations of corporate securities are monotonically related to their capital structure priority, with equity often having a negative duration. The magnitude of this effect increases with firm leverage. We use these insights to challenge existing results on stock-bond comovements and factor pricing. For example, though overlooked, higher leverage and lower priority reduce the correlation between corporate security and government bond returns, and these variables explain time-series and cross-sectional variation in correlations; traditional market model regressions significantly understate corporate bond betas; and regressions on standard term and default factors dramatically overstate interest rate and default risk.
- DOI
- 10.1093/rapstu/raac003
- Volume
- 12
- Issue
- 3
- Pages
- 706-753
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref