Pricing like things alike: The role of financial statement comparability in bond pricing

Abstract

Using a modified financial statement comparability measure and data from the Chinese corporate bond market, this paper investigates the role of firm-pair financial statement comparability in bond pricing. Following the notion that financial statement comparability should be an ideal clue to screen benchmarks, we predict that, in the book-building stage, institutional investors tend to benchmark the bond in question to bonds issued by informationally comparable firms to make their quotes of interest rates. The empirical results show that the issue spread of a new bond is convergent to the yield spread of the bonds issued by comparable firms. This phenomenon is more pronounced when the issuing firm has no listed bond to act as a reference and when the comparable firm is covered by more analysts. Further analysis in the secondary market shows that the spreads of two bonds issued by two accounting comparable firms are not only convergent but also highly correlated. Our study provides a better understanding of how a corporate bond is priced and highlights the value of financial statement comparability to bond investors.