Cookies?
Library Header Image
LSE Research Online LSE Library Services

Stock-bond return co-movement and accounting information

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

[img] Text - Accepted Version
Repository staff only until 31 May 2019.

Download (784kB) | Request a copy
Identification Number: 10.1111/jbfa.12253

Abstract

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
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
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
Sets: Departments > Accounting
Collections > Economists Online
Date Deposited: 04 Apr 2017 10:31
Last Modified: 20 Apr 2019 01:44
URI: http://eprints.lse.ac.uk/id/eprint/72244

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics