Two-step estimation of linear models with ordinal unobserved variables: The case of corporate bonds

This article proposes a two-step method for estimating the impact of bond indenture provisions and other financial variables on the risk and yields of investment-grade and speculative corporate bonds. In the first step, the default risk of bonds is estimated as a function of indenture provisions and the characteristics of bonds and the issuing firms by an ordered probit. In the second step, the effects of default risk and bond characteristics on yields are estimated after a measure of bond default risk is obtained by a conditional-mean method.

[1]  R. Kaplan,et al.  Statistical Models of Bond Ratings: A Methodological Inquiry , 1979 .

[2]  Sankarshan Acharya,et al.  A Generalized Econometric Model and Tests of a Signalling Hypothesis with Two Discrete Signals , 1988 .

[3]  T. Ho,et al.  Bond indenture provisions and the risk of corporate debt , 1982 .

[4]  J. Horrigan.  DETERMINATION OF LONG-TERM CREDIT STANDING WITH FINANCIAL RATIOS , 1966 .

[5]  Joseph V. Terza,et al.  Estimating linear models with ordinal qualitative regressors , 1987 .

[6]  Ramon E. Johnson.  TERM STRUCTURES OF CORPORATE BOND YIELDS AS A FUNCTION OF RISK OF DEFAULT , 1967 .

[7]  L. Fisher.  Determinants of Risk Premiums on Corporate Bonds , 1959, Journal of Political Economy.

[8]  Richard W. McEnally,et al.  Factors Affecting Seasoned Corporate Bond Prices , 1981, Journal of Financial and Quantitative Analysis.

[9]  J. S. Thatcher.  The Choice of Call Provision Terms: Evidence of the Existence of Agency Costs of Debt , 1985 .

[10]  M. Marr,et al.  SEC Rule 415: The Ultimate Competitive Bid , 1984, Journal of Financial and Quantitative Analysis.

[11]  Louis H. Ederington.  NEGOTIATED VERSUS COMPETITIVE UNDERWRITINGS OF CORPORATE BONDS , 1976 .

[12]  C. Hsiao.  REGRESSION ANALYSIS WITH A CATEGORIZED EXPLANATORY VARIABLE , 1983 .

[13]  Jerold B. Warner,et al.  On financial contracting: An analysis of bond covenants , 1979 .

[14]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[15]  G. E. Pinches,et al.  A MULTIVARIATE ANALYSIS OF INDUSTRIAL BOND RATINGS , 1973 .