Are Low Equity R² Firms More or Less Transparent? Evidence from the Corporate Bond Market

Abstract

We examine the relation between a firm's equity R2 and the pricing and design of its debt securities. We find that firms with less synchronous stock returns are associated with a higher cost of debt after controlling for default and liquidity risks. Bonds issued by low synchronicity issuers also experience larger price reactions to information signals provided by equity analysts. Further analysis demonstrates that lower synchronicity is associated with cross‐sectional variation in the use of call provisions and with split S&P and Moody's bond ratings. Contrary to conventional interpretation, these results suggest that low R2 reflects inferior information transparency and higher information risk.

Information environment and stock price synchronicity: Evidence from auditor characteristics

“…Devos et al (2015) examine the market response to analyst recommendation revisions across firms with high and low stock return synchronicity and find that low synchronicity stocks are associated with a less informative environment. Hao et al (2018) reach a similar conclusion based on their evidence on corporate debt securities characteristics. In sum, this emerging body of literature provides evidence opposite to the conventional view that low synchronicity reflects informed prices, and suggests the quality of the information environment is positively associated with stock price synchronicity.…”

Asymmetric information and daily stock prices in Brazil

“…Diamond and Kuan (2018) adopted the Corwin and Schultz (2012) bid-ask spread estimator to investigate the cost to investors of changes in U.S. stock market regulations aimed at diminishing the risks caused by highfrequency trading. Hao, Prevost, and Wongchoti (2018) found asymmetric information is a relevant factor in the negative association between stock prices' low synchronicity and cost of debt in a large sample of corporations.…”

The Effect of Innovation Barriers on Construction Firms’ Innovation Orientation

“…as measures for R2 to be considered as substantial, moderate, and weak, respectively. In Social studies R2 value is usually very low and weakest values is to be high relatively (Colton & Bower, 2002;Hair et al, 2011;Hao, Prevost, & Wongchoti, 2018). R2 values were 0.29 for the adoption, whereas 0.24 for the creation, and these values are accepted by consumer behavior research standards (Kock, 2017).…”