Credit Sentiments in Conference Calls and Bond Market Returns

Abstract

We examine whether and how bond market returns are affected by credit sentiments in conference calls, which refer to the tone of management and analysts when they discuss credit-related topics. We first show that more positive credit sentiments in conference calls are associated with more positive credit rating changes as well as lower CDS spreads and cost of debt in the future. Consistent with the asymmetric bond price responses to earnings news in the literature, we document a positive relation between credit sentiments and bond returns around earnings announcements mainly for firms with negative earnings news. We also document a significant relationship between credit sentiments and future bond returns, suggesting that bond investors underreact to credit sentiment information. Cross-sectional analysis shows that management credit sentiments are more informative for firms with more debt or worse credit ratings, but its informativeness is substantially reduced when the macro credit environment is extremely negative. Analyst credit sentiments are more informative for firms with recent issuance of new bonds or credit rating downgrades when management might have incentives to inflate their credit sentiments.

Keywords: credit sentiments, conference call, credit risks, bond returns, earnings announcement

JEL Classification: G11, G12, G14, M41