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Stock-bond return co-movement and accounting information

Cascino, Stefano ORCID: 0000-0002-6703-741X (2017) Stock-bond return co-movement and accounting information. Journal of Business Finance and Accounting, 44 (7-8). 1036 - 1072. ISSN 0306-686X

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Identification Number: 10.1111/jbfa.12253


I examine how an important attribute of financial reporting quality, i.e., accounting conservatism, affects the sensitivity of corporate bond returns to changes in the value of equity (i.e., the hedge ratio). The correlation between stock and bond returns (comovement) is a fundamental input for asset allocation decisions as it determines the diversification benefits of bonds relative to equities within an investment portfolio. According to structural models of credit risk, co-movement should be generally positive, but lower when the risk of wealth transfers from bondholders to shareholders is severe. I find that firms that report conservative earnings and use covenants in their bond contracts exhibit on average stronger co-movement. This result is consistent with conservatism providing bondholders with a credible and contractible signal that improves monitoring thus preventing wealth transfers.

Item Type: Article
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Additional Information: © 2017 John Wiley & Sons Ltd
Divisions: Accounting
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited: 04 Apr 2017 10:31
Last Modified: 16 May 2024 02:31

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