Temporal resolution of uncertainty and corporate debt yields: An empirical investigation

Abstract

Designing novel proxies for temporal resolution of uncertainty (TRU), we find that the later the uncertainty facing the firm is resolved, the larger the yields on corporate debt issued between 1987 and 1996. This result is robust to different test specifications and is of nontrivial economic significance. An ordered probit test confirms that the speed at which uncertainty is resolved for a given firm is not incorporated in the grading process, although it is priced by the market. Further tests lend more support to the hypothesis of investors' intrinsic timing preferences than to agency-driven increases in risk. © 2006 by The University of Chicago. All rights reserved.