The Timeliness of the Bond Market Reaction to Bad News Earnings Surprises

59 Pages Posted: 12 Oct 2009 Last revised: 7 Jul 2011

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Jieying Zhang

University of Southern California - Leventhal School of Accounting

Date Written: May 12, 2011

Abstract

The purpose of this study is to investigate how bondholders’ limited upside potential impacts the timeliness of the bond market reaction to bad news earnings surprises. We find that bond prices anticipate the majority of the information in bad news earnings surprises, but none of the information in good news earnings surprises, well before the earnings announcements. This contrasts sharply with stock prices, which anticipate only a relatively modest amount of both good and bad news prior to the announcements. We also find that bond prices, but not stock prices, anticipate bad news surprises about financial statement components that are commonly used in debt covenants. These findings are consistent with bond prices impounding bad news more quickly than good news, and with the bond market interpreting bad news more negatively and expending more resources to discover bad news than the stock market. These findings contribute to the literature by improving our understanding of the role of accounting information in the bond market, and how it systematically differs from its role in the stock market.

Keywords: corporate bond market, anticipation of bad news, bond prices, information content, earnings surprise

JEL Classification: M43, G14, G15

Suggested Citation

DeFond, Mark L. and Zhang, Jieying, The Timeliness of the Bond Market Reaction to Bad News Earnings Surprises (May 12, 2011). Available at SSRN: https://ssrn.com/abstract=1432124 or http://dx.doi.org/10.2139/ssrn.1432124

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

Jieying Zhang

University of Southern California - Leventhal School of Accounting ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States
213-740-8705 (Phone)
213-747-2815 (Fax)

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