Informational Efficiency in the Corporate Bond Market

Sonja Lisa Buschulte

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: This dissertation examines the informational efficiency in the corporate bond market. More precisely, it shows how new information stemming from announcements of bond issuing firms impacts the prices of these bonds. While the equity market efficiency is well examined, historically limited data quality and the complexity of bonds leave research gaps in the corporate bond market. Composed of three studies, this dissertation uses a comprehensive sample of US corporate bond trading data to close these gaps further. The first study examines the power of event studies in corporate bond markets and thus sets the basis for testing informational efficiency in the bond market around any event. It shows that two market phenomena negatively impact the informative value of results: Test power decreases rapidly in the presence of event induced variance. Moreover, bond market illiquidity is problematic with samples focused on above average maturities and credit risks. The second study specifically tests informational efficiency around dividend announcements that imply dividend payout ratio changes. It provides insights into significant, negative reactions that bondholders exhibit and highlights the complex effects that drive these bond market reactions. Additionally, it shows the explanatory power of signaling and wealth transfer hypotheses, while the information content hypothesis is refuted. The third study analyzes the interaction effect between earnings and dividend announcements. The results of this study suggest that a strong interaction effect is present in the corporate bond market and that it is robust across several specifications. Consequently, the interaction effect of dividend and earnings announcements has to be considered when evaluating the overall contained information for the bond market.

Date: 2025-05-12
New Economics Papers: this item is included in nep-mac and nep-mst
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