Credit Spread and Decomposed Institutional Equity Ownership: An Information Asymmetry Perspective

This paper investigates whether information asymmetry affects corporate bond credit spreads. To gauge the extent of information asymmetry, we use decomposed equity institutional ownership based on the past investment and trading styles (Bushee(1998, 2001)). First, we detect that different institutional groups are associated with firms with varying degrees of information asymmetry. Moreover, we find that decomposed IOs contribute to cross-sectional variations in corporate bond yield spreads even after controlling for measures of information asymmetry, including probability of informed trading, analyst forecast dispersion, and accounting disclosure rankings. The effects are most prominent for short-term bonds, and for bonds with lower rating, higher leverage and higher equity return volatility. They survive adjustments for equity style of the issuing company. Finally, the time-series variation in a firm’s information asymmetry condition, as captured by changes in decomposed IOs, is found to provide important information for changes in credit spread.