Bond Market Reaction to Earnings Announcement in Japan

Abstract

　This paper investigates the reaction of the corporate bond market to earnings announcements by measuring the reaction of the corporate bond market in terms of changes in corporate bond prices on a daily basis. As a result of the analysis, the following two points are clarified. First, the corporate bond market reacts only to bad news, and that the reaction is larger than the reaction to good news. In addition, it is clear that the corporate bond market begins to incorporate bad news into prices in the period before earnings announcements. These evidences show the usefulness of earnings information in the corporate bond market. Second, we show that the reaction of the corporate bond market to bad news is greater for firms with low accuracy of management earnings forecasts. This suggests that corporate bond investors use the accuracy of management earnings forecasts as one of the factors in making investment decisions based on earnings information.