Unexpected Defaults: The Role of Information Opacity

Review of Accounting Studies, forthcoming

66 Pages Posted: 2 Jun 2023 Last revised: 16 May 2024

See all articles by Aytekin Ertan

Aytekin Ertan

London Business School

Yun Lee

Singapore Management University

Regina Wittenberg Moerman

Northwestern University

Date Written: April 23, 2024

Abstract

Bond defaults are undesirable yet natural outcomes of risky investments. What is also crucial but hitherto underexplored is the unexpectedness of defaults. We develop a parsimonious measure of default unexpectedness and highlight its economic importance by demonstrating that unexpected defaults are associated with unfavorable recovery outcomes and adverse price changes in peer firm bonds. We then examine how default unexpectedness relates to information opacity. We find that firms with opaque financial reporting and weak voluntary disclosure experience more unexpected defaults. Defaults also occur more unexpectedly when the external information environment is opaque—when rating agencies disagree on a firm’s credit risk and when the media coverage is low. We further report evidence on a specific case in which transparent firms suffer unexpected defaults—when creditors’ run incentives are particularly high. Overall, our paper introduces default unexpectedness as an economically relevant construct, offers a tractable measure, and highlights the role of transparency in mediating this phenomenon.

Keywords: bond defaults, unexpected defaults, recovery, spillover, information opacity, transparency, financial reporting, voluntary disclosure, information environment

JEL Classification: D82, G32, G33, M41, O16

Suggested Citation

Ertan, Aytekin and Lee, Yun and Wittenberg Moerman, Regina, Unexpected Defaults: The Role of Information Opacity (April 23, 2024). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=4464680 or http://dx.doi.org/10.2139/ssrn.4464680

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
00442070008131 (Phone)

HOME PAGE: http://www.aytekinertan.com

Yun Lee (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Regina Wittenberg Moerman

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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