Illiquidity-Driven Return Synchronicity and Information Environment: Evidence from the Corporate Bond Market

47 Pages Posted: 29 May 2024

See all articles by Zehua Zhang

Zehua Zhang

Hunan University

Ran Zhao

San Diego State University

Zhirui Song

affiliation not provided to SSRN

Abstract

Gassen, Skaife, and Veenman (2020) document that stock return synchronicity is predictably biased downward as a result of stock illiquidity. We supplement their findings by providing comprehensive evidence of how the illiquidity of corporate bonds, which is an important determinant of bond spread and returns, dampens the incorporation of firm-specific information into bond prices, and results in lower return synchronicity. The result persists after implementing robustness checks and controlling for endogeneity. Channel analysis shows that the negative relation between bond return illiquidity and synchronicity is more pronounced for firms operating in weaker information environments. Our results support the noise interpretation of lower synchronicity (Li, Rajgopal, and Venkatachalam 2014) by providing novel evidence from the U.S. corporate bond market.

Keywords: Bond illiquidity, return synchronicity, price informativeness

Suggested Citation

Zhang, Zehua and Zhao, Ran and Song, Zhirui, Illiquidity-Driven Return Synchronicity and Information Environment: Evidence from the Corporate Bond Market. Available at SSRN: https://ssrn.com/abstract=4847250 or http://dx.doi.org/10.2139/ssrn.4847250

Zehua Zhang (Contact Author)

Hunan University ( email )

Lushan Road, Yuelu District
Changsha, Hunan
China

Ran Zhao

San Diego State University ( email )

San Diego, CA 92182-0763
United States

Zhirui Song

affiliation not provided to SSRN ( email )

No Address Available

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