Term Structure of Credit Spreads and Cross–Section of Stock Returns∗
نویسندگان
چکیده
The term structure of credit default swap (CDS) spreads contains useful information about the firm’s fundamentals. Companies with a high CDS slope tend to experience increases in default risk, negative earning surprises and lower profitability in the future. Such information gets incorporated only gradually into stock prices. Firms in the lowest decile of CDS slope outperform the highest decile by 1.20% per month. This result holds mainly for stocks facing high arbitrage costs and during periods of high level of initial investor sentiment. It cannot be explained by the Fama-French factors, default risk, or the risk premium associated with the variation in default intensity. In a longer sample, we document that the slope of corporate bond yields also negatively predicts future stock return. JEL Classification: G12.
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