Aggregate Earnings and Corporate Bond Markets


  • Accepted by Douglas Skinner. I thank an anonymous referee, Dion Bongaerts, Renhui Fu, Gerard Mertens, Erik Peek, Peter Pope, Buhui Qiu, Bill Rees, Gil Sadka, Rui Shen, Theodore Sougiannis, Mathijs van Dijk, Manuel Vasconcelos, and David Veenman, and workshop participants at Columbia Business School, Cornerstone Research, Erasmus School of Economics, ESSEC Business School, EAA 28th Doctoral Colloquium, EAA 35th Annual Congress, HEC Paris, IESEG School of Management, Rotterdam School of Management, Universidad Carlos III de Madrid, University of Amsterdam, and Vrije Universiteit for helpful comments. The views expressed in this article are solely those of the author, who is responsible for the content, and do not necessarily represent the views of Cornerstone Research.


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.