Disagreement and Bond PEAD

This paper documents post-earnings announcement drift (PEAD) in corporate bond prices using transaction data. We find a counterintuitive relationship between the drift and trading volume: PEAD is more pronounced for more heavily traded bonds than for less frequently traded bonds. Across markets, PEAD is observed for credit default swaps but not for stocks. We explain these findings using a unified model that incorporates both debt and equity trading, where investors possess private information about the underlying firm’s cash flows and may hold differing opinions. Our empirical evidence supports the model’s prediction that payoff structures and investor disagreement account for the distinct price dynamics across asset classes.

This paper was accepted by Lukas Schmid, finance.

Funding: The authors acknowledge research support from the Center for Investing at HKUST. Y. Xiong thanks the support by National Natural Science Foundation of China [NSFC 72422007] and the Research Grants Council of the Hong Kong Special Administrative Region, China [Project 16501523].

Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2024.07966.