Initial Evidence on the Role of Accounting Earnings in the Bond Market

• Published in: Journal of accounting research Vol. 47; no. 3; pp. 721 - 766
• Main Authors: EASTON, PETER D., MONAHAN, STEVEN J., VASVARI, FLORIN P.
• Format: Journal Article
• Language: English
• Published: Malden, USA Blackwell Publishing Inc 01-06-2009; Blackwell Publishing; Wiley Blackwell; Blackwell Publishing Ltd
• Series: Journal of Accounting Research
• Subjects: Accounting; Accounting research; Analytical forecasting; Bond issues; Bond market; Bond markets; Bonds; Cash flow; Corporate bonds; Earnings; Earnings forecasting; Financial accounting; Financial bonds; Financing methods; Investment grade bonds; Junk bonds; Pay-off; Securities markets; Studies; Trade
• ISSN: 0021-8456; 1475-679X
• DOI: 10.1111/j.1475-679X.2009.00333.x

We document that: (1) the incidence of bond trade increases during the days surrounding earnings announcements, (2) there is a bond-price reaction to the announcement of earnings, and (3) there is a positive association between annual bond returns and both annual changes in earnings and annual analysts' forecast errors. All of these effects are larger when earnings convey bad news or when the underlying bond is more risky. Taken together, our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market.