RT Journal Article
SR Electronic
T1 Why Is Accounting Information Important to Bondholders?
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 82
OP 107
DO 10.3905/jfi.2017.26.3.082
VO 26
IS 3
A1 Doina Chichernea
A1 Alex Petkevich
A1 Kainan Wang
YR 2016
UL https://pm-research.com/content/26/3/82.abstract
AB The authors investigate the relevance of accounting information for bondholders. Their results imply that credit markets access firms’ default information through accounting signals. This information is reflected through cash flow (CF) and discount rate (DR) news. Specifically, the sensitivity of bond prices to news increases as firms get closer to default, owing to increasing firm-level credit risk or because aggregate credit conditions worsen. However, the latter is more important. Thus, the importance of a given accounting signal depends on 1) the mix of CF and DR news it reflects; 2) the firm’s proximity to default; and 3) the aggregate credit conditions. The authors incorporate these insights into a dynamic trading strategy that earns significant risk-adjusted returns. These results are robust after controlling for liquidity and transaction costs.TOPICS: Fixed income and structured finance, credit risk management