What Does the Corporate Bond Market Know?

The relative informational efficiency of corporate retail bonds: Evidence from the London Stock Exchange

“…Ronen and Zhou (2013) who find that bond and stock markets are equally informationally efficient when liquidity and institutional features are taken into account. Further, my results are different to Bittlingmayer and Moser (2014) who show that no evidence exists that stock returns systematically lead bond returns, or that the stock market is more efficient that the bond market. My results are closer to the results of Hong et al (2012), Gebhardt et al (2005), Downing et al (2009), and Kwan (1996) who find that the stock market is relatively more efficient than the bond market.…”

“…On one hand, a number of studies find that stock returns lead bond returns and, therefore, the stock market is relatively more efficient than the bond market (e.g., Downing et al, 2009;Kwan, 1996;Blume et al, 1991;Cornell and Green, 1991;Hong et al, 2012;Gebhardt et al, 2005). On the other hand, Hotchkiss and Ronen (2002), Ronen and Zhou (2013), and Bittlingmayer and Moser (2014) show that no evidence exists that stock returns systematically lead bond returns, or that the stock market is more efficient that the bond market. According to Downing et al (2009), Hotchkiss and Ronen (2002), and Alexander et al (2000), these conflicting findings could be attributed to the opaque nature of the corporate bond market and to the complex relation between the returns of a firm's stock and its publicly traded high yield debt that exhibits both similarities and 2 According to figures from the Bank of England, the growth rate of stock lending to nonfinancial UK businesses was -5.2% (-£2.1 billion) in 2010, -2.1% (-£0.8 billion) in 2011, -3.7% (-£1.5 billion) in 2012, and -3.0% (-£1.1 billion) by the end of November 2013 (Bank of England, 2014).…”

The lead-lag relation between the stock and the bond markets

“…They find that when the dynamic patterns of liquidity as well as trade size and timing effects are accounted for, stock leads disappear and therefore the lack of agreement regarding the relative efficiency of the corporate bond market can be reconciled. More recently, Bittlingmayer and Moser (2014) report that for the case of negative news, the HY bonds are more informational efficient compared to stocks. The evidence is stronger for firms with volatile stock returns, high coupon and short maturity bonds, and stocks with high prior abnormal return.…”

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

“…DeFond and Zhang (2014) present evidence that negative earnings surprises are partially anticipated in the speculative‐grade bond market, a result supported by evidence that speculative‐grade corporate bond prices impound negative information substantially before equity prices (Bittlingmayer & Moser, 2014). In this case, considering only the abnormal return and trading activity in the short window immediately around the announcement understates the magnitude of the information conveyed.…”