Salience theory and cross-sectional corporate bond returns

Xi Chen; Junbo Wang; K.C. John Wei; Chunchi Wu; Linti Zhang

doi:10.1016/j.jempfin.2026.101692

Salience theory and cross-sectional corporate bond returns

Xi Chen, Junbo Wang, K.C. John Wei^*, Chunchi Wu, Linti Zhang

^*Corresponding author for this work

Department of Economics and Finance

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

Abstract

U.S. corporate bonds with high salience theory (ST) value significantly underperform those with low ST value in the subsequent month. In contrast to the salience effect in the stock market driven by the underperformance of stocks with salient upside, the salience effect in the bond market is mainly attributed to the outperformance of bonds with salient downside. This phenomenon is attributed to the unique payoff feature of corporate bonds, which have limited upside but have substantial downside. The salience effect is not driven by characteristics and cannot be explained by downside risk, short-term reversal, or exposure to risk factors. This effect is more pronounced for bonds with low ratings, long maturity, high arbitrage frictions, and high demand from retail investors, and is stronger when economic uncertainty or the sentiment of the credit market is high. The salient thinking of bond investors plays a role different from the reasoning process described by prospect theory. The results show that investors’ biased attention to salient payoffs significantly affects the pricing of corporate bonds.
© 2026 Published by Elsevier B.V.

Original language	English
Article number	101692
Number of pages	24
Journal	Journal of Empirical Finance
Volume	87
Online published	29 Jan 2026
DOIs	https://doi.org/10.1016/j.jempfin.2026.101692
Publication status	Online published - 29 Jan 2026

Funding

John Wei acknowledges financial support from the Research Grants Council of the Hong Kong Special Administrative Region, China (GRF15507320). All remaining errors are our own.

Research Keywords

Salience theory
Cross-section of corporate bond returns
Credit market sentiment
Limits to arbitrage
Behavioral finance

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COPYRIGHT TERMS OF DEPOSITED POSTPRINT FILE: © 2026. This manuscript version is made available under the CC-BY-NC-ND 4.0 license https://creativecommons.org/licenses/by-nc-nd/4.0/.

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title = "Salience theory and cross-sectional corporate bond returns",

abstract = "U.S. corporate bonds with high salience theory (ST) value significantly underperform those with low ST value in the subsequent month. In contrast to the salience effect in the stock market driven by the underperformance of stocks with salient upside, the salience effect in the bond market is mainly attributed to the outperformance of bonds with salient downside. This phenomenon is attributed to the unique payoff feature of corporate bonds, which have limited upside but have substantial downside. The salience effect is not driven by characteristics and cannot be explained by downside risk, short-term reversal, or exposure to risk factors. This effect is more pronounced for bonds with low ratings, long maturity, high arbitrage frictions, and high demand from retail investors, and is stronger when economic uncertainty or the sentiment of the credit market is high. The salient thinking of bond investors plays a role different from the reasoning process described by prospect theory. The results show that investors{\textquoteright} biased attention to salient payoffs significantly affects the pricing of corporate bonds.{\textcopyright} 2026 Published by Elsevier B.V.",

keywords = "Salience theory, Cross-section of corporate bond returns, Credit market sentiment, Limits to arbitrage, Behavioral finance",

author = "Xi Chen and Junbo Wang and Wei, {K.C. John} and Chunchi Wu and Linti Zhang",

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AU - Chen, Xi

AU - Wang, Junbo

AU - Wei, K.C. John

AU - Wu, Chunchi

AU - Zhang, Linti

PY - 2026/1/29

Y1 - 2026/1/29

N2 - U.S. corporate bonds with high salience theory (ST) value significantly underperform those with low ST value in the subsequent month. In contrast to the salience effect in the stock market driven by the underperformance of stocks with salient upside, the salience effect in the bond market is mainly attributed to the outperformance of bonds with salient downside. This phenomenon is attributed to the unique payoff feature of corporate bonds, which have limited upside but have substantial downside. The salience effect is not driven by characteristics and cannot be explained by downside risk, short-term reversal, or exposure to risk factors. This effect is more pronounced for bonds with low ratings, long maturity, high arbitrage frictions, and high demand from retail investors, and is stronger when economic uncertainty or the sentiment of the credit market is high. The salient thinking of bond investors plays a role different from the reasoning process described by prospect theory. The results show that investors’ biased attention to salient payoffs significantly affects the pricing of corporate bonds.© 2026 Published by Elsevier B.V.

AB - U.S. corporate bonds with high salience theory (ST) value significantly underperform those with low ST value in the subsequent month. In contrast to the salience effect in the stock market driven by the underperformance of stocks with salient upside, the salience effect in the bond market is mainly attributed to the outperformance of bonds with salient downside. This phenomenon is attributed to the unique payoff feature of corporate bonds, which have limited upside but have substantial downside. The salience effect is not driven by characteristics and cannot be explained by downside risk, short-term reversal, or exposure to risk factors. This effect is more pronounced for bonds with low ratings, long maturity, high arbitrage frictions, and high demand from retail investors, and is stronger when economic uncertainty or the sentiment of the credit market is high. The salient thinking of bond investors plays a role different from the reasoning process described by prospect theory. The results show that investors’ biased attention to salient payoffs significantly affects the pricing of corporate bonds.© 2026 Published by Elsevier B.V.

KW - Salience theory

KW - Cross-section of corporate bond returns

KW - Credit market sentiment

KW - Limits to arbitrage

KW - Behavioral finance

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JO - Journal of Empirical Finance

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Salience theory and cross-sectional corporate bond returns

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Research Keywords

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