The price and volume response to earnings announcements in the corporate bond market

Abstract

We examine abnormal returns and trading activity in bond markets around earnings announcements. Previous work provides mixed evidence on the relative impact of positive and negative surprises and the degree of response in investment-grade and speculative-grade bonds. We find that these announcements convey value-relevant information for both positive and negative earnings surprises in both investment and speculative-grade bonds. We also document significant heterogeneity in the response across industries, with muted responses in both abnormal returns and trading activity for bonds of firms in the financial and utilities industries.

The potential built‐in supply effect from margin trading in the Chinese stock market

“…Moreover, with interest-bearing loans, margin traders should have shorter horizons than those not trading on margin and should have more incentives to exit in response to earnings events.3 We show in this paper that abnormal returns are lower for stocks with significant built-in supply impacts of margin interest around positive earnings surprises Lasser et al (2010). find that the level of short interest is positively associated with the price reaction to the most positive and the most negative earnings surprises Woodley et al (2020). find that abnormal returns move in the same direction as both positive and negative earnings surprises for speculative-grade bonds, but only for negative earnings surprises for investment-grade bonds.…”

“…2 We focus on earnings announcements because they are regular, scheduled, and compulsory disclosure events, and they may be viewed as speculative events for investors. Earnings news provides value-relevant information about a firm during the most recent fiscal period, informing investors about its future outlook and confirming or refuting the earnings expectations of investors and analysts in the stock market (Lasser et al, 2010) and the bond market (Woodley et al, 2020). 3 Speculative demands lead to purchase of stocks before scheduled earnings events, and the announcements of earnings news, whether good or bad, stimulate the sale of stocks (Berkman et al, 2009).…”

Trade price clustering in the corporate bond market

“…The corporate bond market is also a dealer market and is generally illiquid. This illiquidity enhances both informational asymmetry and dealer power, creating search and negotiation costs (Li, 2007; Holden, 2009; Goyenko et al ., 2009; Woodley et al ., 2020; Goldstein and Hotchkiss, 2020). Collectively, these advantages in the corporate bond market can lead to dealers quoting spreads on a wider pricing grid than the minimum price increment, which can result in price clustering (Harris, 1991; Christie and Schultz, 1994).…”