Aggregate Earnings and Corporate Bond Markets

Abstract

I examine the previously unexplored relation between aggregate earnings changes and corporate bond market returns. I find that aggregate earnings changes have a negative relation to investment‐grade corporate bond market returns and a positive relation to high‐yield corporate bond market returns. The aggregate earnings‐returns relation is lower (i.e., less positive or more negative) for bonds with higher credit ratings and longer maturities. Further, I show that the aggregate earnings‐returns relation is driven by both the expected and the news component of aggregate earnings changes. The expected component is negatively related to expected returns, and the news component is positively related to cash flow news and changes in nominal interest rates, and negatively related to changes in default premia. My results contribute to the understanding of the role of earnings in corporate bond markets as well as the macroeconomic role of accounting information.

Aggregate Accounting Data and the Prediction of Credit Risk

“…We also extend the findings of Gkougkousi (2014), who examines the relation between corporate bond market returns and aggregate earnings. Specifically, she focuses on aggregate corporate bond market returns, while we directly link aggregate earnings changes to sovereign credit risk changes.…”

“…A recent strand of accounting research revolves around the issue of whether aggregate accounting earnings have the ability to predict fundamental economic variables (Bonsall et al, 2013;He & Hu, 2014;Konchitchki & Patatoukas, 2014a, 2014bKothari et al, 2013;Patatoukas, 2014). The main research questions in these studies concern whether aggregate earnings bear sufficient information content to predict macroeconomic variables such as the rate of inflation (Shivakumar, 2007;Shivakumar & Urcan, 2017), gross domestic product (GDP; Konchitchki & Patatoukas, 2014a), conditions in capital markets as captured by market returns (He & Hu, 2014;Kothari et al, 2006; or bond returns (Gkougkousi, 2014), and finally, the economy in general (Konchitchki & Patatoukas, 2014b).…”

The Changing Relevance of Accounting Numbers to Debt Holders over Time

“…2 ,3 Nor can the fact that research has focused 1 See Hayn (1995) and Burgstahler and Dichev (1997). 2 Among the few studies that adopt the debt holders' perspective in evaluating the usefulness of accounting numbers are Ball et al (2008), Zhang (2009, 2011), Shi (2003), Easton et al (2009), Elliott et al (2010), Gkougkousi (2012), Khurana and Raman (2003), Plummer and Tse (1999), and Sridharan (2011). 3 The Securities Industry and Financial Markets Association reports that the market value of the U.S. corporate bond market was $7.9 trillion at the end of 2011 (see http://www.sifma.org/research/statistics.asp).…”

Real Activity Forecasts Using Loan Portfolio Information

“…Additionally, in untabulated tests, we regress the provision on eight lags of changes in the coincident index and find that lags of changes in the coincident index are not predictive of the provision after controlling for known determinants of the provision. and Gkougkousi [2014] examine the concurrent relation between aggregate earnings and bond market returns and show that the relation varies with macroeconomic conditions, the use of fair value accounting, and bond ratings. Shivakumar [2007Shivakumar [ , 2010 calls for additional research to better understand the links between aggregate-level accounting information and the macroeconomy.…”