Capital Structure Priority Effects in Durations, Stock-Bond Comovements and Factor-Pricing Models

Review of Asset Pricing Studies, forthcoming

78 Pages Posted: 12 Sep 2013 Last revised: 15 Feb 2022

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2021

Abstract

We show theoretically and empirically that the durations of corporate securities are monotonically related to their capital structure priority, with equity often having 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; regressions on standard term and default factors dramatically overstate interest rate and default risk.

Suggested Citation

Choi, Jaewon and Richardson, Matthew P. and Whitelaw, Robert F., Capital Structure Priority Effects in Durations, Stock-Bond Comovements and Factor-Pricing Models (September 1, 2021). Review of Asset Pricing Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=2324904 or http://dx.doi.org/10.2139/ssrn.2324904

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

Matthew P. Richardson (Contact Author)

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

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+1 (212) 998-0349 (Phone)
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Robert F. Whitelaw

New York University ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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United States

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