Initial Evidence of the Role of Accounting Earnings in the Bond Market

The authors document that: (1) the incidence of bond trade increases during the days surrounding earnings announcements, (2) there is a bond-price reaction to the announcement of earnings, and (3) there is a positive association between annual bond returns and both annual changes in earnings and annual analysts' forecast errors. All of these effects are larger when earnings convey bad news or when the underlying bond is more risky. Taken together, these results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market.