When does the bond price reaction to earnings announcements predict future stock returns?

Abstract

In this paper I show that the bond price reaction to earnings announcements has predictive power for post-announcement stock returns and that this predictive ability is driven by the bonds of non-investment grade firms. I find that bonds’ predictive ability is more pronounced in firms that have a lower level of institutional shareholder ownership and whose bonds are more liquid. This paper enhances our understanding of the relation between the stock and bond markets and complements the literature which documents whether, and under what circumstances, various accounting-based measures and financial statement components predict post-announcement stock returns.