Breadth of Ownership and the Cross Section of Corporate Bond Returns
Management Science, Forthcoming
70 Pages Posted: 9 Feb 2018 Last revised: 17 Apr 2023
Date Written: April 1, 2023
Abstract
Using breadth of corporate bond fund ownership to proxy for the combination of short-sale constraints and divergence of opinions in the corporate bond market, this paper investigates whether and to what extent Miller’s (1977) theory holds for corporate bonds. Consistent with the theory, we document a significant and positive relation between changes in breadth and the cross section of future corporate bond returns. Due to the bounded upside of debt, the ability of changes in breadth to predict returns appears to be less pronounced for corporate bonds relative to stocks. Furthermore, this predictability is stronger among bonds with higher credit risk, indicating that the effect of short-sale constraints and divergence of opinions on bond mispricing tends to be larger for riskier bonds with more upside potential and thus more scope for overvaluation.
Keywords: Miller’s theory • breadth of corporate bond fund ownership • corporate bond return predictability • short-sale constraints • divergence of opinions
JEL Classification: G12, G23
Suggested Citation: Suggested Citation