Asset Growth Anomaly of Corporate Bonds: A Decomposition Analysis

Abstract

There is a pervasive inverse relationship between corporate asset growth rates and bond performance. Lower performance of bonds issued by high-asset growth firms may be the result of a lower default risk since such bonds are better collateralized or due to mispricing where their default probabilities are underestimated. A decomposition of bond performance into yields and yield changes shows that credit spread changes resulting from collateralizable growth account for 64\% of corresponding bond performance. The effect is stronger among junk bonds and during periods of high investor sentiment, suggesting mispricing plays a big role in bond performance.

Keywords: Bond return; Mispricing; Asset growth; Collateralizable assets; Extrapolation bias

JEL Classification: G11; G22