Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5088038 | Journal of Banking & Finance | 2017 | 17 Pages |
Abstract
This study provides new insight into the recent debate on profitability and investment patterns in the cross-section of expected returns. Relying on implied risk premia of U.S. corporate bonds, we document a strong negative relation between exposure to the profitability factor and cost of debt. We do not observe a robust relation between exposure to the investment factor and cost of debt. Our findings are consistent with profitability being a risk factor, but suggest that high profitability implies lower (and not higher) risk. Because the market portfolio consists of all risky assets including corporate bonds, our findings challenge a risk-based explanation for the profitability and investment patterns in stock returns.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Benedikt Franke, Sebastian Müller, Sonja Müller,