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

Wei Hao, Andrew Prevost and Udomsak Wongchoti ()

Financial Management, 2018, vol. 47, issue 4, 865-909

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.

Date: 2018
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