Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns
We study the role played by “bond book-to-market” ratios in U.S. corporate bond pricing. Controlling for numerous risk factors tied to default and priced asset risk, including yield-to-maturity, we find that the ratio of a corporate bond’s book value to its market price strongly predicts the bond’s future return. The quintile of bonds with the highest book-to-market ratios outperforms the quintile with the lowest ratios by more than 3% per year, other things equal. Additional evidence on signal delay, scope of signal efficacy, and factor risk rejects the thesis that the corporate bond market is perfectly informationally efficient, although significant positive alpha spreads are erased by transaction costs.
Helpful comments and suggestions by Darrell Duffie and Eugene Fama are gratefully acknowledged. We thank the Fink Center for Finance and Investments, the Price Center for Entrepreneurship and Innovation, the Ziman Center for Real Estate, and the Rosalinde and Arthur Gilbert Program in Real Estate, Finance and Urban Economics for generous funding. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.