How Sensitive to Fundamentals is the Cost of Debt? Evidence from Commodities Boom and Bust

Corporate bond yields depend on a company’s fundamentals. However, the Finance literature has difficulty quantifying this relation due to endogeneity bias. Current operating margins, market capitalization, and Tobin’s Q can proxy for fundamentals but also are caused by the corporate cost of debt due to, for example, the costs of financial distress. To solve this challenge, this paper links oil and mining corporate bonds with the price of the...