Split Bond Ratings and Information Opacity Premium

Financial Management, Forthcoming

33 Pages Posted: 7 Jul 2009

See all articles by Miles Livingston

Miles Livingston

University of Florida - Department of Finance, Insurance and Real Estate

Lei Zhou

Northern Illinois University - Department of Finance

Date Written: July 3, 2009

Abstract

This paper examines the relationship between split bond ratings and bond yields at the notch level for newly issued corporate bonds. We find that split rated bonds average a 7-basis-point yield premium over non-split rated bonds of similar credit risk. The yield premium increases from 5 basis points for one-notch splits to 15 (20) basis points for two-notch (three-notch) splits. These findings indicate that investors demand higher yields for split rated bonds to compensate for the information opacity of such bonds. In addition, the yield premium for split rated bonds is higher during economic recessions indicating investors are more risk averse during economic downturns. Consequently, split ratings impose higher borrowing costs for firms, especially during economic downturns.

Keywords: bond rating, split rating, bond yield, information opacity

Suggested Citation

Livingston, Miles B. and Zhou, Lei, Split Bond Ratings and Information Opacity Premium (July 3, 2009). Financial Management, Forthcoming , Available at SSRN: https://ssrn.com/abstract=1429493

Miles B. Livingston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainsville, FL 32611-7168
United States
352-392-4316 (Phone)
352-392-0301 (Fax)

Lei Zhou (Contact Author)

Northern Illinois University - Department of Finance ( email )

Wirtz Hall
DeKalb, IL 60115
United States
815-753-1115 (Phone)
815-753-0504 (Fax)

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