The authors are respectively, Assistant Professor of Finance at the Else School of Management, Millsaps College, Jackson, MS; and Professors of Finance at the College of Business Administration, University of Arkansas, Fayeteville, AR. They are grateful to the anonymous referee for helpful comments on an earlier version of this paper.
THE REGULATION EFFECT OF CREDIT RATINGS ON BOND INTEREST YIELD: THE CASE OF JUNK BONDS
Article first published online: 7 DEC 2006
Journal of Business Finance & Accounting
Volume 21, Issue 4, pages 511–531, June 1994
How to Cite
Brister, B. M., Kennedy, R. E. and Liu, P. (1994), THE REGULATION EFFECT OF CREDIT RATINGS ON BOND INTEREST YIELD: THE CASE OF JUNK BONDS. Journal of Business Finance & Accounting, 21: 511–531. doi: 10.1111/j.1468-5957.1994.tb00333.x
- Issue published online: 7 DEC 2006
- Article first published online: 7 DEC 2006
- (Paper received December 1991; accepted April 1992.)
This paper examines the ‘regulation effect’ of bond ratings of yield. It is shown that the high yield premia on ‘speculative bonds’ not only reflect the high probability of default, but also contain an effect of regulation. A multiple discriminant analysis (MDA) technique is used to separate the default component of yield premium from the regulation effect. The results in the study suggest that non-regulated investors, by taking advantage of the regulation effect, may earn an extra premium on a diversified portfolio of ‘speculative bonds’, at least for the period under this study (from January 1982-June 1987).