Even-Tov O Journal of Accounting & Economics, 2017, 64(1). When Does the Bond Price Reaction to Earnings Announcements Predict Future Stock Returns? Even-Tov O Journal of Accounting & Economics, 2017, 64(1). Reported by Sichen Liu, 16720856

Introduction Innovation point Hypotheses Sample selection, variable definitions Empirical tests Summary Expectation

1. Introduction The information contained in earnings announcements plays an important role in the determination of stock prices. Numerous studies show that stock prices do not immediately and fully incorporate all of the information in earnings announcements. Prior research has shown that bond prices react to earnings news. Testing whether, and under what circumstances, the bond price reaction to earnings announcements has predictive power for future stock returns is the central focus of this study.

2. Innovation point First, this paper is the first to provide evidence that bond prices can predict post-announcement stock returns using information released in earnings announcements. Second, the study provides a better understanding of when (more liquid bonds) bond prices have a greater ability to predict future stock returns. Third, it is also the first study to examine the impact that sophisticated stock traders have on the relative efficiency of bond and stock prices, finding that the predictive ability of bonds is weaker for firms with greater institutional shareholdings.

3. Hypotheses (原文没有，根据原文整理) H1: There exists a positive relation between the bond price reaction to earnings announcements and future stock returns. H2: The positive relation between the bond price reaction to earnings announcements and future stock returns will be stronger for firms with non- investment grade bonds than for those whose bonds are investment grade. H3: The positive relation between the bond price reaction to earnings announcements and future stock returns will be stronger for firms with fewer institutional shareholders. H4: The positive relation between the bond price reaction to earnings announcements and future stock returns will be stronger for firms whose bonds are more heavily traded by sophisticated traders.

4. Sample selection, variable definitions Data: TRACE database, FISD database; from January 2005 to December 2014 accrued interest for bond: The bond return: The raw bond price reaction: The abnormal bond price reaction: The buy-and-hold abnormal stock return:

5. Empirical tests H1: For the decile with the highest raw (abnormal) bond price reactions, the average buy-and-hold abnormal stock return is 1.07 (1.11) percent. This compares to −1.70 (−0.96) percent for the lowest decile. The difference of 2.77 (2.08) percentage points is significantly positive and provides preliminary evidence that the reaction of a firm's bonds to its earnings announcements has predictive power for the firm's post-announcement stock return.

H2: The difference between the average buy-and-hold abnormal stock returns of the highest and lowest raw (abnormal) bond return deciles of the bonds of non- investment grade firms is a positive and significant 7.49 (6.35) percentage points. These results suggest that the ability of bond returns to predict stock prices comes exclusively from the bonds of non-investment firms.

The coefficient on the interaction term (β2) is negative and significant. The 60-day difference in post- announcement stock returns between the highest and lowest bond return quintiles for firms with below-average institutional stock holdings is a significant 7.40 percentage points (29.6 percentage points, annualized). For the subsample of firms with above-average institutional stock holdings, it is only 2.2 percentage points (8.8 percentage points, annualized). H3:

H4: For the low liquidity subsample, the coefficient on the bond price reaction is insignificantly different from zero. In contrast, for the high liquidity subsample the coefficient is positive and significant. The predictive ability of bond returns for post- announcement stock returns is higher for firms whose bonds are more liquid.

6. Summary The bond price reaction to an earnings announcement has explanatory power for future stock returns. Bonds' predictive ability comes from non-investment grade firm subsample. Bonds' predictive power is stronger for firms whose shares are less heavily held by sophisticated shareholders. The earnings announcement price reaction of the more liquid bonds are predictive of post-announcement stock returns, while those of the less liquid bonds are not.

Can this study be applied to the Chinese market? 7. Expectation Can this study be applied to the Chinese market?

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