Stock-Bond Return Co-Movement and Accounting Information
بازده سهام-اوراق قرضه و اطلاعات حسابداری
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 (co-movement) 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.
Credit risk, Wealth
JEL Classification: G12, G32, M41