The impact of earnings announcement on bond price.

Abstract

This study presents evidence about information content of earnings announcements to bond investors. First, it examines an association between the sign and magnitude of earnings changes and bond returns. Second, if the association exists, this study examines whether the association varies systematically with such variables as firm size and default risk which have been shown to affect the association between earnings changes and stock returns. Results presented in this study indicate that earnings announcements have information content to bond investors; i.e. the results suggest a significant positive association between the sign and magnitude of earnings changes and bond returns. Results for the cross-sectional variation of the association between earnings changes and bond returns (ERC) suggest that the ERC is positively related to bond default risk measured by bond ratings and negatively related to firm size measured by the market value of common shares outstanding.