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| Corporate Bond Credit Spreads and Forecast Dispersion by Levent Güntay of Indiana University, and September 2007 Abstract: Recent research establishes a negative relation between stock returns and dispersion of analysts earnings forecasts, arguing that, due to short-sale constraints in equity markets, asset prices more reflect the views of optimistic investors. In this article, we examine whether a similar effect prevails in corporate bond markets. After controlling for common bond-level, firm-level, and macroeconomic variables, we find evidence that bonds of firms with higher dispersion demand significantly higher credit spreads than otherwise similar bonds and that changes in dispersion reliably predict changes in credit spreads. We argue the dominating effect of dispersion is to proxy for future cash flow uncertainty due to the limited role of short-sale constraints in corporate bond markets. JEL Classification: G12, G32, G33. Keywords: Corporate bonds, credit risk, forecast dispersion. Download paper (467K PDF) 45 pages
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