Why is Accounting Information Important to Bondholders?

Posted: 9 Jan 2017

See all articles by Doina Chichernea

Doina Chichernea

University of Denver - Reiman School of Finance

Alex Petkevich

The University of Toledo - Department of Finance

Kainan Wang

University of Toledo

Date Written: January 5, 2017

Abstract

We investigate the relevance of accounting information for bondholders. Our results imply that the credit markets access the firm’s default information through accounting signals. This information is reflected through cash flow (CF) and discount rate (DR) news. Specifically, the sensitivity of bond prices to the news increases, as firms get closer to default due to increasing firm-level credit risk or because aggregate credit conditions worsen. However, the latter is more important. Thus, the importance of a given accounting signal depends on: 1) the mix of CF and DR news it reflects; 2) the firm’s proximity to default; and 3) the aggregate credit conditions. We incorporate these insights into a dynamic trading strategy that earns significant risk-adjusted returns. These results are robust after controlling for liquidity and transaction costs.

JEL Classification: G11; G12

Suggested Citation

Chichernea, Doina and Petkevich, Alex and Wang, Kainan, Why is Accounting Information Important to Bondholders? (January 5, 2017). Journal of Fixed Income, 2017, https://doi.org/10.3905/jfi.2017.26.3.082. Available at SSRN: https://ssrn.com/abstract=2894594

Doina Chichernea

University of Denver - Reiman School of Finance ( email )

2101 S. University Blvd
Denver, CO 80208
United States

Alex Petkevich (Contact Author)

The University of Toledo - Department of Finance ( email )

2801 W. BANCROFT ST.
Mail Stop 103
Toledo, OH Ohio 43606
United States

HOME PAGE: http://homepages.utoledo.edu/apetkev

Kainan Wang

University of Toledo ( email )

Department of Finance
Mail Stop 103
Toledo, OH 43606
United States

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