Tavy Ronen and Xing Zhou. Rutgers University

Where did all he Informaion Go? Trade in he Corporae Bond Marke Tavy Ronen and Xing Zhou Rugers Universiy Working Paper Series WCRFS: 08-12

Where did all he Informaion Go? Trade in he Corporae Bond Marke Tavy Ronen* Deparmen of Finance and Economics Rugers Business School Rugers Universiy Xing Zhou Deparmen of Finance and Economics Rugers Business School Rugers Universiy Firs Draf: Augus 2007 This Draf: May 2008 Absrac This paper presens srong evidence of bond marke efficiency wih special emphasis on esablishing parameers for conducing corporae bond marke specific analysis. While reail rades display quick reacions o firm specific informaion, insiuional ones reac wihin he shores ime horizons considered (5 minues). Speed of adjusmen ess indicae ha corporae bond rades ofen fully incorporae all informaion in earnings surprises before significan sock reacions occur. We show ha he corporae bond marke serves an imporan venue for informaion-based rading, paricularly when equiy marke liquidiy is low. BBB-raed bonds are shown o reac wih speeds akin o hose of higher yield bonds, seemingly anicipaing fuure downgrades. Furher, shifing informaion-based rading across bonds issued by he same firm proves of impor. We esablish he exisence of bond price leaders, which are characerized by specific mauriy, age and complexiy. We reconcile previous mixed sock/bond lead-lag conclusions by showing how sock leads can be erroneously inferred when bond specific feaures and rading paerns are no accouned for. Inference reversals indicae ha socks do no necessarily lead bonds. Keywords: Fixed Income, Corporae Bond Prices, Informaional Efficiency, Insiuional/Reail Trades, Liquidiy JEL classificaion: G 100 (General Financial Markes) We wish o hank Paul Benne, Hank Bessembinder, Ivan Brick, Hazem Daouk, Amy Edwards, Umi Gurun, Edie Hochkiss, Simi Kedia, Pam Moulon, Oded Palmon, Joshua Ronen, Gideon Saar, Mike Suzer, Dan Weaver, Jason Wei, seminar paricipans a Universiy of Colorado a Boulder and Rugers Universiy for helpful commens and suggesions, and Durga Panda and Chrisopher Rozendaal for valuable research assisance. We hank he Whicomb Financial Cener for daa assisance. All errors are our own responsibiliy. *Corresponding auhor. Address: 111 Washingon Sree, Newark NJ 07102;

1. Inroducion The marke efficiency of corporae bonds has no been esablished in he lieraure wihou conroversy. Indeed, here are seemingly conflicing resuls (and hence conclusions) regarding marke efficiency. In his paper, we endeavor o pu an end o a major par of he ambiguiy surrounding he quesion of wheher bonds are raded in an efficien marke. Firs and foremos, we are able o documen ha bonds seem o rapidly impound announcemens, including hose made during non rading hours. Furher, we find ha since for any given firm here ypically is mulipliciy of bond issues (in conras o a single or very few sock issues), examining he efficiency of a firm s bonds wih respec o a cross secion can lead o misleading inferences. In paricular, we find ha here exis price leader bonds in he sense ha such bonds reac wih greaer sensiiviy o informaion han ohers. In fac, here ends o be a leas one bond ha reacs as quickly (if no more) han equiy, paricularly afer informaion evens. We also deec sysemaically differen paerns of informaion incorporaion across differen raders. Specifically, we documen ha insiuional raders appear o reac wihin 5 minues, whereas reail raders are somewha slower (wihin 30 minues), alhough boh groups of raders seem o reac very efficienly o informaion. In fac, when equiy marke liquidiy is low, all informaion is ofen incorporaed ino bond prices before significan sock price reacions occur. Our resuls collecively imply wih a large degree of confidence ha bonds are raded in an efficien marke in a manner no dissimilar o equiy. While early sudies examining bond price behavior were consrained by he marke s long hisory of opaqueness (and resuling lack of daa), recen improvemens in 1

ransparency have generaed new research in he area. Hochkiss and Ronen (2002) examine pre-trace (FIPS) ransacion price summaries for 55 high-yield bonds and find ha socks do no lead bonds, and also ha corporae news announcemens are quickly incorporaed ino boh bond and sock prices. Zhou (2006) finds ha lagged TRACE 50 high-yield bond prices conain valuable informaion abou curren sock reurns, and ha hey serve an imporan role in disseminaing firm specific informaion. 1 In conras, Downing, Underwood, and Xing (2007) conclude ha sock reurns do lead non-converible bond reurns a he hourly level in imes of financial disress, (and ha herefore) he corporae bond marke is less informaionally efficien. 2 Gurun, Johnson, and Markov (2008) also find significan sock leads for daily bond indices, which diminish wih cerain informaion releases. While he exan lieraure provides mixed resuls regarding he relaive informaional efficiency of socks and bonds, inferences based on our direc ess of bond price reacions o corporae news (while explicily accouning for insiuional feaures of his marke) provides poenial reconciliaion of earlier conradicions. Hopefully, his paper will help ease lingering doubs regarding bond marke efficiency. One insiuional feaure of he corporae bond marke no previously incorporaed in efficiency ess is he disinc difference beween insiuional and reail bond rading. The U.S. corporae bond marke is dominaed by large insiuional raders, wih poenial 1 Zhou (2006) s analysis incorporaes he opion marke rades in addiion o he sock and bond marke ransacions. Chava and Tookes (2005) also incorporae he opion markes, and examine he volailiy reacion of sock, bond and opions o macroeconomic and firm specific informaion, finding significan effecs near announcemens. Overall, hey find ha corporae bond and opion rades have informaion conen for fuure sock price movemens. 2 For converible bonds, Downing, Underwood, and Xing (2007) finds ha hese resuls also hold, bu only for hose wih conversion opions deep in he money. Kwan (1996) firs examines he relaion beween individual socks and bonds using weekly quoe daa and also finds evidence in suppor of sock leads. 2

rade disadvanages for reail invesors. For insance, Warga (2004) finds ha reail rades, accouning for abou 65% of all ransacions (bu only 1.8% of volume), carry ransacion coss abou five imes he size of hose for insiuional rades. We show ha analysis based on combined samples can resul in erroneous inferences since reail and insiuional sized rades around earnings announcemens display disinc informaion conen. When hese differences are accouned for, each group exhibis rapid speeds of adjusmen, wih all relevan informaion fully impounded wihin one hour, ypically preemping equiy marke adjusmen. Specifically, opporuniies o preemp equiy raders may exis immediaely afer earnings announcemens, which mos ofen occur overnigh (afer marke-close or before marke-open). While equiy raders are relaively liquidiy disadvanaged in he marke for NYSE lised socks during hese hours, he around he clock over he couner bond marke appears o provide a useful informaion rading vehicle. 3 This is paricularly rue for insiuional bond raders who (wih accompanying lower ransacion coss) are shown o be dominan players in his marke, wih he mos rapid rade responses. Indeed, our resuls are indicaive of sraegic informaion-based rading. Since increasing benefis or sakes should encourage greaer informaion gahering/absorpion for large raders, siuaions which offer bond raders comparaive advanages in informaion rade should be marked by greaer propensiy o rade. Furher, he sakes may differ across bonds: bonds wih special feaures and hose wih he lowes credi raings exhibi he highes sensiiviy o firm specific informaion, wih rading paerns differing on good and bad news days. 3 Imporanly, we do observe sock rades overnigh. Alhough NYSE lised socks heoreically can rade on regional exchanges and elecronic communicaion neworks (ECNs) before marke open, liquidiy and price discovery are low, discouraging equiy rade. 3

On a mehodological noe, while early sudies have focused on he relaive informaional efficiency of he bond and equiy markes using a Vecor Auo-Regression (VAR) approach, such analysis conduced on pair-wise comparisons of each bond wih he issuer s sock can be misleading. Resuling inferences are limied, in ha hey canno reveal more han wheher he firm s bonds are on average any slower in reflecing informaion han he firm s sock. Imporanly, hey canno no uncover he informaion mos desired by a single rader; i.e. wheher here exiss a leas one bond consiuing an informaion-based rading venue (on an informaional par wih he equiy). 4 Moreover, he idenificaion of such a bond may be infeasible (using his approach), in ha differen price leaders may swich off over ime. We find ha he concenraion of insiuional rades following earnings announcemens shifs from cerain bonds o ohers, yielding new price leaders. Cerain characerisics, such as age of he bond, mauriy, credi qualiy and bond complexiy are shown o be linked wih price leaders. These resuls indicae he imporance of conducing efficiency analysis ha incorporaes he shifing liquidiy of differen bonds issued by he same firm. Ignoring such facors underesimaes he abiliy of a rader o move on firm specific informaion using a fixed income insrumen. This nowihsanding, he VAR approach suffers furher limiaions in he conex of examining informaional efficiency wih respec o he corporae bond marke. Poenially, significan noise associaed wih (he clearly dominan number of) reail rades confounds inferences drawn from ess ha do no disinguish hem from he insiuional rades (which accoun for he majoriy of rading volume). Second, omiing off exchange hour (overnigh) rades (as previously done) can inroduce bias o ime- 4 Furher, including infrequenly raded bonds biases VAR ess owards finding a sock lead. 4

series ess of bond ransacions, given he rapid reacions observed before equiy marke open. Accouning for boh rade size effecs and rades clusered around announcemens can generae surprising reversals of previously documened resuls. Granger-causaliy ess indicae ha large bond rades are no led by socks and ha heir efficiency can be deemed comparable o ha of he equiy. This paper may carry imporan policy impacs. While our resuls are indeed consisen wih Green (2007), who models reail invesors as having less access o informaion and similar acquisiion coss, hey should also bear on he growing debae on ransparency. 5 In conras o he predicion ha bond marke ransparency can worsen erms for efficiency, Spa (2004) argues ha i can be opimal for risk sharing (unlike in he equiy markes where ransparency may hamper liquidiy o large raders). 6 Our resuls, combined wih exan evidence of low rading coss for larger bond rades, imply ha he relaively larger informaion conen of insiuional rades does no negaively affec dealer paricipaion erms, eiher in erms of he speed or cos. While daa limiaions do no allow for direc ess of ransparency effecs on efficiency (in erms of he effec of he inroducion of TRACE), we can assess he effeciveness of oher regulaory conrols. Specifically, he phased in reporing ime decreases wihin he TRACE regime indicae enhancemens in he (already swif) price discovery process. As reporing lags for TRACE bonds decrease from 75 o 15 minues, reail rades exhibi increasingly faser price reacions surrounding informaion evens, while insiuional 5 Green (2007) models differenial search coss of reail invesors in new issues wih limied secondary marke ransparency. He finds ha reail search coss resul in more disperse pricing in he secondary marke, wih a differen oucome for insiuional rades. Our resuls are also consisen wih Green, Hollifield and Schurhoff (2007) in which an uninformed reail secor canno properly monior dealer ren seeking. 6 Naik, Neuberger, and Viswanahan (1999) provide such a seing, where he marke maker needs no scale back he size of rade since is informaional conen should already be refleced in he markeplace. 5

rades do no exhibi slower reacions (sill wihin he shores horizons considered). These resuls, combined wih decreased price dispersions associaed wih he regulaory changes sugges ha addiional reducions in mandaory reporing windows could furher improve erms o rade for reail invesors. Mos imporanly however, our resuls are somewha a odds wih he radiional senimen (a leas, held by some schools of hough) ha bonds are less informaionally efficien han socks, and indicae he imporance of conducing ess ha accoun for he various insiuional deails indigenous o he corporae bond marke. The abiliy of bond invesors o rade in large amouns, paricularly when liquidiy is low in he equiy marke, renders he corporae bond marke a legiimae vehicle for informaion revelaion. Our findings regarding he behavior of cerain invesmen grade bonds forify his conclusion: While high-yield issues exhibi he mos rapid reacions o news, BBB-raed bonds are highly news sensiive. Insiuional (reail) rades reac wihin 10 (60) minues, suggesing an efficien marke process wherein credi raing downgrades are anicipaed. This paper is organized as follows. Secion 2 discusses some salien characerisics of he corporae bond marke and illusraes he imporance of incorporaing liquidiy and rading paerns in empirical ess of bond marke efficiency. Secion 3 describes he TRACE daa used in his sudy and provides evidence regarding he disribuion of insiuional rades in our sample. Secion 4 analyzes he informaional efficiency of he insiuional versus reail bond rades wih respec o firm specific informaion, as well as he relaive speeds of adjusmen. Informaional efficiency is shown o be affeced by boh bond complexiy and credi raing. Finally, salien characerisics of price leaders are explored. Secion 5 uses a VAR approach o revisi 6

he lead-lag relaions beween socks and bonds, and illusraes he imporance of explicily accouning for bond rading paerns in saisical analyses wihin his conex. Secion 6 concludes. 2. Liquidiy and rade size effecs in he corporae bond marke While i is a largely acceped fac ha he U.S. corporae bond marke operaes differenly from equiy markes, he lieraure documening hese differences, paricularly wih regard o he paerns and behavior of rades and reurns is decidedly hin. Sill, some pivoal differences have been esablished. For example, corporae bonds end o rade in subsanially larger amouns, and less frequenly, han do he socks issued by he same firms. Anecdoal evidence is consisen wih he conjecure ha invesors ypically buy and hold bonds, wih liquidiy rapidly declining afer hey are absorbed ino porfolios. See also Alexander, Edwards and Ferri (2000), Schulz (2001), Warga (2004), Mahani, Nashikkar, Subrahmanyam, Chacko, and Mallik (hereafer MNSCM) (2007), and Bao, Pan and Wang (2008), among ohers who provide evidence of bond illiquidiy negaively relaed o age. This is paricularly rue for invesmen-grade bonds, which are believed o be purchased primarily as non speculaive invesmens, are expeced o be priced wihin a narrow range of he correc value, and are generally considered easy subsiues for porfolio managemen needs (Warga (2004)). Corporae bond marke dealers ofen specialize in offering highly bundled porfolio services, such as solving porfolio, research and sraegy problems. 7 Edwards 7 See Saunders, Srinivasan, and Walers (2002) for a horough descripion of he insiuional bond dealer marke. They find he marke o be very compeiive, wih iner-dealer brokers who mainain boh sides of he marke while providing rader anonymiy. Bond raders generally iniiae conac wih oher insiuional raders or brokers wih poenial ineres in a paricular bond, who in urn submi quoes, which are no legally binding bu repuaion consrained. Bid response ime is usually as quick as less han 1-2 minues, paricularly when boh paries are familiar wih he bond and when i has no special provisions. 7

and Nimalendran (2007) find evidence of marke segmenaion, wih dealers ofen rading only large or small sized rades, bu no boh. Typically, insiuional bond invesors include invesmen companies, pension funds and hedge funds who poenially dominae smaller invesors boh in heir abiliy o acquire/process informaion and in heir insiuional relaionships wih bond dealers. In he absence of explici informaion regarding he wealh maximizaion funcions of insiuional versus reail invesors, cerain conjecures can be made. In paricular, he sheer quaniies insiuions buy for heir fixed income porfolios may have larger consequences o heir porfolio reurns han do he more modes ransacions made by individual diversified raders. Hence, he benefi o insiuional raders, no only from gahering informaion, bu from also quickly inerpreing and acing on i, is poenially larger han ha for reail invesors. The relaively lower rading frequencies observed in he bond marke (as compared o equiy markes) are no necessarily indicaive of inefficiency. Infrequen bu large rades may in some par indicae invesors waiing for relevan and maerial informaion, and hen rapidly acing on i in large blocks. Insiuional corporae bond rades have been shown o ofen be a leas 50 imes as large as a ypical sock exchange ransacion. Thus, he lack of rade on a paricular day does no necessarily imply a lack of efficiency, and he resuling rading frequency differences beween equiy and bond markes may yield differen resuls regarding marke qualiy measures. For example, unlike in he equiy markes, rading coss and liquidiy for corporae bonds do no seem o decline wih rading aciviy (Edwards, Harris and Piwowar (2007)). Several papers examining corporae bond prices documen differen levels of spreads for reail and large rades, wih a negaive relaionship beween rade size and 8

rading coss. See for example Hong and Warga (2000), Chakravary and Sarker (2003), Warga (2004), Bessembinder, Maxwell and Venkaaraman (2006), Edwards, Harris and Piwowar (2007), and Goldsein, Hochkiss, and Sirri (2007). Saunders, Srinavasan and Walers (2002) find ha large-block (over $10 million) rades are no associaed wih negaive price impacs, implying ha hey are probably no associaed wih adverse marke informaion and do no impose liquidiy consrains on dealers. Schulz (2001) finds ha all else equal, corporae bond spreads decrease wih rade size, dealer size and how acive he insiuion is. This combined evidence suggess ha dealers are more likely o lose money on he lower spread large rades and less likely o offer good pricing on small bond orders. Tha is, beyond poenially high fixed coss refleced in small rades, reail invesors may be relaively uninformed, hereby more suscepible o large dealer rens. Green, Hollifield, and Schurhoff (2007) esimae a srucural bargaining model o show ha dealers exercise subsanial marke power. In Green, Hollifield, and Schurhoff (2006), he same auhors show ha small newly issued municipal bond rades occur a a wide range of prices almos simulaneously, wih some small invesors rading a prices as much as 5% away from hose of informed raders, and ohers appearing informed, and rading on aracive erms. Relaedly, Goldsein and Hochkiss (2007) find differen price dispersions for large and small rade sizes in he corporae bond new issues afermarke. Finally, Biais and Green (2007) show ha he migraion of liquidiy in corporae bond rading volume increased dramaically in periods when insiuional invesors and dealers became more imporan relaive o reail invesors, and sugges ha increased reail ransacion coss may be due o such migraion. 8 8 Guo, Sarkar, and Shuermann (2007) show ha he marke compensaes reail raders in he corporae bond marke for he greaer illiquidiy of heir rades, and illusrae he imporance of accouning for invesor 9

3. NASD s TRACE sysem and daa descripion On July 1, 2002, NASD (FINRA as of July 2007) iniiaed TRACE, an auomaed rade reporing sysem for corporae bonds. This over-he-couner corporae bond marke real-ime disseminaion service is he firs o provide comprehensive, real-ime access o public corporae bond ransacions. Trade informaion can be accessed by individual invesors (boh reail and insiuional) and marke professionals, and covers all OTC aciviy, which represens over 99% of domesic corporae bond marke aciviy. 9 Since is inducion, he TRACE sysem experienced various implemenaion phases, as well as some reporing lag requiremen changes, wih increased ransparency implicaions. Specifically, ransacion reporing ime for NASD members was decreased from 75 o 45 minues on Ocober 1, 2003, furher reduced o 30 minues on Ocober 1, 2004, and finally o 15 minues on July 1, 2005. For TRACE ransacions disseminaed from January 1, 2003 unil December 31, 2006, we obain descripive firm characerisics (Compusa) and bond characerisics/credi raing changes (Mergen FISD). We pariion he sample by S&P credi raing (AAA/AA, A, BBB, and BB and lower), and idenify he 103 firms wih he greaes bond marke aciviy during he sample period (30 per overlapping credi raing group). The daa are hen resriced o include only hose 66 firms wih publicly raded heerogeneiy in undersanding he deerminans of credi risk. 9 Fully so since 2/7/2005. This includes all U.S. dollar-denominaed deb securiies ha are eligible under rule 11310(d). Specifically excluded are exchange rades in lised bonds, morgage and asse backed securiies, deb issued by governmen sponsored eniies, collaeralized morgage obligaions, and money marke insrumens. The public disseminaion aspec and bond composiion were phased in gradually. From 7/1/2002, TRACE covered 550 corporae bonds including all invesmen-grade bonds wih a leas $1 billion in issuance, and 50 high yield bonds carried over from NASD's FIPS. On 3/3/2003, he lis was expanded o 4,200 bonds, including all hose wih issue sizes of a leas $100 million and a credi raing of A or higher. On 4/14/2003 roughly 120 BBB-raed bonds wih issue sizes of a leas $1 billion were added, and on 10/1/2004, he lis was expanded o approximaely 22,000 bonds. See NASD s TRACE User Guide, 2006, Version 1.07 a hp://www.nasdbondinfo.com. 10

equiy for which we can idenify ime samped earnings announcemens, such as o allow comparisons on corporae news days across bonds and socks issued by he same firm. The final sample of 8,872,999 ransacions in 8,714 bonds represens more han 50% of all TRACE rades over he 4 year sample period. 10 Sock ransacion daa are obained from he TAQ daabase. Summary characerisics for he sample bonds and heir issuing firms are presened in Table 1. The mean offering amoun is over $194 million dollars, and increases wih credi qualiy. Fory hree percen of bonds are issued wih long erm mauriies, nearly 45% wih medium erm mauriies and he remaining bonds are issued as shor erm insrumens. Sixy-wo percen of bonds in he sample have a leas one embedded opion aached. The disribuion of bonds across credi raings is as follows: 21.2% have a raing of AAA or AA, 32.6% are raed A, 25.4% are raed BBB, and 19.6% of bonds are in he BB or lower raing caegories. Trades are classified as insiuional (reail) if heir par value is greaer han (less han) $500,000. 11 The disribuion of insiuional and reail sized rades is presened in Table 2. Reail rades are roughly six imes more prevalen han insiuional rades, accouning for over 86% of he oal number of rades in our sample, bu for a mos 10% of oal rading volume. While acual volume may be subsanially lower, he exac figure is no available, as TRACE volume is capped a $5 ($1) million for invesmen grade (high-yield) issues. 4. Earnings surprises: where o rade? 10 Following Edwards, Harris and Piwowar (2007), we implemen cerain daa filers: rades occurring in 2002 are excluded o avoid poenially confounding effecs of sysem iniiaion relaed behavior; cancelled, reversed and delay-reversed prior day ransacions are deleed; and all rades wih price deviaions from surrounding rades greaer han 10% are removed. 11 Oher cuoff poins such as $100,000, $250,000 or $1,000,000 are also considered bu do no yield qualiaively differen resuls. Warga (2004) defines reail rades as hose ha are less han or equal o $100,000 par value, and insiuional as above $500,000. 11

In his secion, we examine he price reacion of corporae bonds o corporae earnings announcemens. Afer deermining how quickly corporae bond prices of differen rade sizes reac o firm specific informaion, we assess wihin how much ime all informaion is fully impounded ino prices. We exend upon Hochkiss and Ronen (2002), who sudy he relaive informaional efficiency beween sock and bonds using hourly ransacion summaries for 50 high yield bonds from he Fixed Income Pricing Sysem (FIPS). The improved ransparency and hence daa availabiliy of he corporae bond marke ha has evolved since he inroducion of FIPS allows us o conduc a more rigorous analysis, on a comprehensive se of bonds, across all credi raings, and o focus on he disinc naure of insiuional and reail rades in he corporae bond marke. Finally, we are able o employ acual ransacions daa and o examine bond price behavior a shor horizons (five minue inervals) o effecively capure he price discovery process. 4.1. Dispersion and rading frequency: reail and insiuional Unlike equiy markes, where large rades end o incur higher price impacs, he bond marke is characerized by relaively worse erms o rade for smaller ransacions. Consisen wih earlier evidence showing decreasing rading coss for larger bond rades, Table 3 documens reail volailiy and price ranges nearly five imes greaer han hose of large rades (Warga (2004)) finds reail ransacion coss o be roughly five imes ha of insiuional rades). Noably, hese differences exceed hose implied by wider ransacion cos ranges. While he disance beween he average prices for small and large rades (calculaed as he absolue value of he average price levels difference, normalized by he midpoin) is 0.55% (significan a he 1% level), he average price 12

range for large rades is only 0.42%. High yield bonds presen he sronges divergences (nearly double), suggesing ha higher sake vehicles encourage greaer informaion gahering for insiuional invesors (for whom boh rading coss are low). An illusraive example is ploed in Figure 1, showing ransacion price behavior of he sock and a single bond issued by Ford and GM, he wo mos bond marke acive issuers around wo separae earnings announcemen release daes. 12 Afer he news release, clearly divergen price levels and ranges are observed for reail and insiuional rade size groups. Figure 2 plos he rading aciviy for hese bonds on he same days. While non-announcemen days produce relaively fla volume, insiuional rades exhibi high rading frequency and volumes immediaely following he news release. Large rades converge quickly o one price level, wih subsequen monoonic decreases in rading volume and frequency. Perhaps mos ineresingly, insiuional rade price convergences appear o pre-emp boh heir equiy and reail sized rade counerpars, highlighing he imporance of including off exchange hours in informaional efficiency ess. The price wedge beween he wo rade secors highlighs he reail raders comparaive disadvanage in he corporae bond marke. A relevan quesion for informaional efficiency is wheher he relaive erms o rade for insiuional and reail rades can be opimized hrough regulaion, and may hus carry poenial policy 12 Boh ploed issues (Ford 345370CA6 and GM 370442BT1) have no embedded opions,, have a 30 year original mauriy, and are roughly 4 and 6 years of age, respecively, a ploed announcemen dae. Sriking differences in liquidiy and rading frequency paerns emerge: he 10 mos acive Ford (GM) bonds accoun for 51.98% (32.31%) of all rades, wih he single mos acive Ford (GM) bond capuring 7.47% (5.99%) of rade over he sample period (he ploed bond). While The 734 Ford and 1515 GM bonds consiue 19.5% of all TRACE rade overall, heir inclusion demands cerain qualificaions: Boh experienced downgrades in May 2005. Also, GM launched a series of mid erm noes argeed specifically a he reail secor. To miigae poenial raing-specific effecs, he Ford announcemen dae ploed corresponds o an invesmen-grade raing, wih he GM dae corresponding o a downgraded (below invesmen grade saus) period. 13

implicaions. For example, several papers have documened rading cos decreases for cerain bonds when ransparency is inroduced hrough he TRACE sysem. 13 While ransparency improvemens do no explicily occur during he sample period we examine, cerain reporing requiremens do change, which may enhance he rading environmen. TRACE reporing lags decreased in phases from a mandaory 75 minue window o an evenual 15 minues. Of special ineres is wheher small rades benefi from hese changes, and if so, wheher he benefi is grea enough o reduce any comparaive disadvanage. Panel B of Table 3 indicaes ha boh he price dispersions and ranges for small and large rades alike decline monoonically and significanly wih each reporing improvemen. Finally, he comparaive disadvanage of reail invesors (difference beween he rading coss for insiuional and reail rades) shrinks significanly. 4.2. Reacion o new informaion In his secion we direcly es wheher, and by how much, corporae bonds reac o firm specific informaion. Our ess provide a concree analysis of he speed of adjusmen of bond prices o earnings news, which canno be deermined hrough lead-lag analysis. Simply pu, bi-variae VAR ess can heoreically resul in a finding ha socks on average lead a firm s cross secion of bonds, bu his would no necessarily imply he absence of bonds ha reac as quickly (or faser) han he sock o value relevan informaion. 13 Using a proprieary daa se, Edwards, Harris, and Piwowar (2007) find ha TRACE ransparen bonds have lower ransacion coss han opaque ones, and ha ransacion coss drop when he bonds become ransparen. The larges decreases are shown for small rades. This is consisen wih Bessembinder, Maxwell, and Venkaaraman (2006) who find ha insurance company ransacion coss declined for bonds upon inclusion on TRACE sysem, while for heir sample of BBB raed bonds, Goldsein, Hochkiss, and Sirri (2007) show ha increased ransparency has eiher a neural or posiive effec on liquidiy. In erms of ransacion coss, hey do documen significan decreases for rade sizes beween 21 and 250 bonds. 14

We obain analyss earnings forecas daa from IBES and ime samps from Faciva. For each of he 828 announcemens for he 1,469 bonds issued by 66 firms, we compare repored earnings o he median of analys forecass jus before he announcemen. As in Hochkiss and Ronen (2002), we calculae he log forecas errors: S ij = ln(a ij /F ij ), where S i,j denoes he surprise componen in he j h earnings announcemen for firm i, A i is he announced earnings per share, and F i is he median forecas earnings per share. We regress he bond price change on he surprise componen of he earnings announcemen: ( ΔP / P) = α + β S + ε, where P/P =(P -P -close )/P -close, and denoes a cerain poin of ime afer he announcemen was released. Since each of he 828 earnings announcemens in our sample occur eiher afer marke close or before marke open, percenage price changes are calculaed as changes from he previous day s closing price, P -close. Resuls are repored separaely for reail, insiuional and all-size rade groups. Breaking ou by rade size presens a more realisic picure han he combined sample, which is poenially confounded by he dominan number of reail rades. Table 4 repors resuls from pooled sample regressions wih es saisics compued using heeroscedasic-consisen variance esimaes (Whie (1980)). Large rades (Panel A) reac immediaely o news surprises (wihin 5 minues of he announcemen, significan a he 1% level), unlike reail sized rades, which reac significanly wihin he full hour. The resuls are robus o differen cuoff poins for deermining insiuional rade size (Panel B). Finally, we find ha overall, special bonds reac wih greaer sensiiviy o informaion han sraigh bonds, wih insiuional 15

sized rades reacing wihin 5 minues, compared o sraigh bonds, reacing wihin 20 minues. 14 This resul is consisen wih opion feaures/issuing channel rendering he bonds more sensiive o firm specific informaion, and is compaible wih evidence regarding bond complexiy in Edwards, Harris, and Piwowar (2007), who show ha bonds wih special feaures are associaed wih lower ransacion coss han sraigh bonds. A relevan quesion of impor is how quickly informaion is fully incorporaed ino bond prices. If he price discovery process begins swifly bu akes a longer ime o complee adjusmen, his bears on informaional efficiency deerminaion. Of special ineres is he relaive speed of adjusmen for reail and insiuional sized rades. Balduzzi, Elon, and Green (2001), assess he impac of macro-announcemens on Treasury bonds using wha we will name backward regressions. Hypoheically, if all informaion is correcly incorporaed ino price by some ime () afer an announcemen, hen prices changes beyond ime () should be independen of he surprise componen. Thus, we conduc he regressions as before, bu change window deerminaion such ha ( P/P) =(P 180 -P )/P, measuring he price change from ime o 180 minues afer he earnings release (since all rades are shown in Table 3 o reac well wihin ha ime frame). Resuls are presened in Table 5. Large bond rades (reacing wihin 5 minues of announcemens) incur a weakly significan and shor lived mild correcive price adjusmen wihin he firs half hour, bu impound all informaion fully wihin a mos 45 14 Our sample is broken down as follows, 35% are sraigh bonds, 15 % have variable coupon raes, 9% are fungible, 8.5% have credi enhancemens, 2% are puable, less han 2% are zero coupon bonds, and less han 0.5% are converible, asse backed or exchangeable. The remaining bonds consiue oher special feaures. Five of he 1,469 bonds could no be classified as special or sraigh. 16

minues of he earnings release. 15 Reail sized rades impound informaion wihin one hour of he iniial reacion. We examine wheher shorened reporing ime allowances faciliae faser rade disseminaion (poenially via large rades), simulaing swifer reail rade responses. 16 Since anecdoal evidence suggess ha dealers reduced heir reporing imes significanly wih he firs regulaion change, we consider he periods before and afer July 1, 2005, represening he final reducion o a 15 minue reporing lag. Table 6 illusraes a posiive relaionship beween he reporing window and he amoun of ime unil significan reacions are observed pos announcemen. Noably, reail rades reac significanly o news 30 minues afer announcemen during he shores (15 minue) reporing lag regime. While iner-emporal volume changes could poenially drive hese resuls, Figure 3 indicaes ha boh volume and rading frequency are sable across reporing lag periods. 17 No visible effec is deermined for insiuional rades. In erms of speed of adjusmen ess, he 15 minue reporing window period is characerized by boh reail and insiuional rades fully incorporaing all informaion equally, wihin 45 minues of announcemens, mos ofen preemping significan equiy marke reacion. 4.3. Wha happens when equiy marke liquidiy is low? In fac, he bond marke appears o serve an imporan venue for informaionbased rading afer-hours/pre-open, immediaely afer mos earnings announcemens are 15 Figure 1 demonsraes a similar bu more pronounced correcive paern in he equiy prices. 16 In reference o he phased in reporing window changes, FINRA CDMP Chairman John J Brennan says: The corporae deb marke has always been an imporan one for insiuional invesors, bu i is now of increasing imporance o individual reail invesors, who would benefi from addiional guidance and disclosure. (FINRA news release, Sepember 30, 2004). Perhaps no surprisingly, NYSE Bonds was inroduced on May 22, 2007, in an aemp o faciliae improvemen of rading erms for (primarily) reail cusomers. 17 The elevaed per bond volume during he firs few monhs reflecs he phased in TRACE inclusion of less liquid bonds. 17

released. While i is heoreically possible for boh equiy and bond raders o ransac during off-exchange hours, during he minues/hours immediaely following announcemens, sock volume is hin and price discovery is low. McInish, Van Ness and Van Ness (2002), for example, show ha he majoriy of price discovery and demand for NYSE lised socks occurs on he exchange (no he regionals). Thus, bonds of NYSE lised firms have poenial price discovery comparaive advanages during off exchange hours, when he socks suffer worse han usual erms o rade. 18 This advanage may no be as pronounced for bonds issued by Nasdaq firms, however, which are characerized by non rivial rading volume during he pre-open and pos-rade sessions. 19 Indeed, we find ha on announcemen days, he raio of sock rading volume overnigh o sock volume during he rading day (following announcemens) is 1.27% for NYSE lised firms, compared wih a raio of 5.99% for Nasdaq firms. As expeced, he corresponding bond rading volume raios are 50.20% and only 26.54% for NYSE and Nasdaq firms, respecively. 20 This is consisen wih lower price impac of larger bond rades encouraging rade in corporae bonds, while high price impacs and low price discovery during off exchange hours dampening significan order flow for exchange lised socks. Direc ess of earnings announcemen responses reveal ha insiuional sized bond rades (NYSE sample) ypically reac before he sock (5 minues, versus nearly 2 18 Finally, while here are no se rading hours for corporae bonds, some aferhours rading in bonds may be less liquid han ohers, wih nonconsan liquidiy paerns overnigh. 19 Barclay and Hendersho (2007) show ha here is subsanial volume in he Nasdaq pre and pos rade sessions, as early as 1999. Also, Barclay and Hendersho (2003) show ha even relaively lile rading afer hours (Nasdaq sample) can generae significan price discovery, albei wih noisier prices. 20 I is also possible ha some ECN ransacions would indicae differen responses. However, Barclay, Hendersho and McCormick (2002) documen ECNs as accouning for approximaely 40% of dollar volume raded in Nasdaq securiies, bu only abou 3 percen for lised securiies. Finally, Goldsein, Shkilko, Van Ness and Van Ness (2007) find consisen evidence in erms of ECN marke share of Nasdaq socks in 2003. 18

hours). 21 Conversely, he Nasdaq sample exhibis conemporaneous sock and large bond rade responses. Thus, off- exchange hour reduced sock liquidiy and poenially higher adverse selecion coss can render he bond marke a more naural arena for rade afer overnigh or early morning announcemens. 4.4. The case of BBB raed bonds The effec of credi qualiy on a bond s sensiiviy o firm specific informaion has no been horoughly documened in he lieraure. While a few sudies do examine his, hey are limied by low frequency, non ransacion level daa, or do no direcly examine bond price reacions o informaion. Schulz (2001) finds ha monh-end high-yield bond quoes are no well prediced by Treasury bond price changes, consisen wih his expecaions ha changes in invesmen-grade bond prices are usually caused by ineres rae changes, whereas high-yield bond price movemens are more ofen due o changes in firm specific facors. 22 Downing, Underwood, and Xing (2007) find ha socks do no lead non-converible bonds raed A or above, bu do lead BBB and lower raed bonds, regardless of converibiliy. As expeced, Table 7 demonsraes clearly ha high-yield bonds are far more sensiive o firm specific informaion across all rade sizes han heir invesmen-grade counerpars. While high-yield bonds for he all-size (reail) sample reac significanly o news by he end of 60 (105) minues afer announcemen, invesmen-grade deb prices exhibi no significan reacions. We find srong evidence ha BBB raed bonds display subsanial sensiiviy o firm specific informaion, much like high yield securiies. Insiuional sized rades 21 Our sample includes 1,434 bonds from 45 NYSE lised firms and 35 bonds from 6 NASDAQ firms. 22 Recen sudies on TRACE bonds ha look a ransacion coss find significan differences in coss across credi qualiy classes. Edwards, Harris, and Piwowar (2007) find ha high raed bonds are cheaper o rade han lower raed bonds, wih he laer almos wice as cosly o rade as invesmen-grade bonds. 19

exhibi saisically significan reacions wihin 10 minues of announcemens, apparenly reflecing he firm s deerioraing financial condiion. This anicipaion of fuure credi raing downgrades can provide a proxy for he informaion inheren in he fuure (poenially sale) announcemens. We es for he anicipaion propensiy by examining fallen angels. We examining hose fallen angels for which downgrades are imminen separaely from hose for which hey are eiher farher in he fuure or do no occur a all by he end of he sample period. Panel B of Table 7 documens a clear paern of increasing informaion sensiiviy as ime remaining o downgrade shrinks. For bonds subsequenly downgraded wihin he year, insiuional sized rades display swif reacions o informaion (wihin 10 minues). The predicive naure is bounded by above: BBB raed bonds wih subsequen downgrade announcemens made more han one year ou exhibi similar sensiiviies o hose which experience no subsequen downgrade. Comparing high yield and BBB-raed bond price reacions on good and bad news days proves revealing in erms of poenial informaion based aciviy. BBB raed bonds, exhibi larger divergences beween large and small sized rade prices on good news days han bad news days (Table 8). While bad news is poenially consisen wih general anicipaion of a shif o low grade saus, good news may be associaed wih a larger surprise componen, implying ha he bond may no be furher downgraded. Porfolio inclusion resricions may render his a crucial even. Conversely, high-yield bonds display he greaes divergences afer bad news, wih minimal divergence on good news days. 4.5 Price leaders 20

One imporan facor in deermining marke efficiency for he corporae bond marke is he abiliy o accoun for he shifing liquidiy paerns among bonds issued by he same firm, and he resuling exisence of poenial price leaders. Such bonds would arac a higher concenraion of insiuional rades surrounding news evens. Price leaders are herefore idenified as hose ha arac mos of he insiuional rade immediaely afer earnings releases (by marke open). We find ha he op bond or price leader role shifs from cerain bonds o ohers, afer differen informaion evens. Table 9 indicaes ha on average, he op bond aracs roughly 71% of insiuional rades immediaely afer announcemens are made, boh in erms of number of rades and dollar volume. In fac, he op hree bonds accoun for a combined 95 percen of insiuional rade. 23 Cerain common characerisics are deermined o be associaed wih price leading bonds. Seveny-six percen of he ime, he op bond has he longes original mauriy of hose TRACE bonds issued by he same firm. In a vas majoriy of he cases (80% overall, and 94% for firms ha only have invesmen grade bonds rading on announcemen days), he leading bond is also he mos recenly issued (wih an age of 2.7 years on average, ranging from 5 days o 17 years). This las finding exends upon evidence ha bonds rade acively only for he firs few monhs afer issuance and hen display decreased liquidiy. 24 Our resuls reveal ha corporae bonds may coninue 23 This 95% signifies he percen of insiuional rades boh in erms of number and dollar volume for days on which he insiuional sized rades occur afer he announcemen, based on a 500 bond rade size cuoff. Oher cuoffs are considered: for 100 bonds, he percen drawn by he op hree bonds is 91%, for 250 bonds i is 94%, and for 1000 bonds, i is 96%. All saisics are based on he bonds from 8,714 bonds from 66 firms. 24 See for example, Fabozzi (1996). Empirical evidence supporing he on-he-run versus off-he run effec is given in Sarig and Warga (1989), Chakravary and Sarkar (1999), Hong and Warga (2000), Schulz (2001), and Hochkiss, and Josova (2007). Also, Bao, Pan and Wang (2008) show ha liquidiy is lower for older bonds, and MMSCM (2007) provide evidence of peak laen liquidiy levels a issuance wih 21

rading acively beyond his limi, afer cerain informaion evens. Corroboraive evidence exiss in Edwards, Harris and Piwowar (2007), who show ha 44% of ransacions occur in bonds aged beween 1 year and one half of he original ime o mauriy. Ineresingly, in 80% of he cases, he op bond is boh of long erm and mos recenly issued. Furher, he price leader has a leas one aached embedded opion more han 85% of he cases. Finally, he average price leader s offering amoun is $1,231.24 million, compared o an average offering amoun of $194.32 million for he whole sample. This is no inconsisen wih documened posiive links beween issue size and liquidiy, such as can be found in Hong and Warga (2000), Alexander, Edwards and Ferri (2000), Hochkiss and Josova (2007), MMSCM (2007), and Bao, Pan and Wang (2008). 25 Of grea ineres is he duraion of a price leader s role in capuring he bulk of insiuional rades afer announcemens. We find ha 67% of our price leaders are onehi wonders (he bond leads only once in our sample). An addiional 17% lead wice, bu over 90% of price leaders mainain heir lead for less han (or a mos) hree quarers. Finally, while he leading bond and is characerisics can be idenified as done here, analysis which implicily requires he enire universe on an issuer s bonds o be informaionally equivalen o he firm s equiy would poenially yield confounded inferences, masking bond raders clear abiliy o ac quickly upon informaion wih a few (or one) disinc bonds. seady decreases hereafer. Alexander, Edwards and Ferri (2000) are able o show for heir sample of high yield FIPS bonds ha he highes volume issues are seasoned up o as much as wo years. Warga (1992) esimaes similar paerns. 25 Noably, Crabbe and Turner (1996) find ha he liquidiy of corporae bonds is no relaed o issue size. 22

5. Do socks really lead bonds? The exan lieraure provides mixed resuls on he lead-lag relaionship beween individual socks and bonds. While some sudies find no causal relaion beween sock and bond reurns (Hochkiss and Ronen (2002)), ohers find significan sock leads ((Kwan (1996), Downing, Xing and Underwood (2007), and Gurun, Johnson, and Markov (2008)) and infer herefore ha he corporae bond marke is less informaionally efficien han he sock marke. 26 However, he bi-variae VAR approach may no always be opimal in addressing he informaional efficiency of he corporae bond marke. Pairwise comparisons of each bond (or alernaively, a porfolio of bonds) wih he issuer s sock can be misleading, since hey canno indicae more han wheher he firm s bonds on average lag socks. Specifically, he abiliy of a rader o ac quickly upon informaion in he bond marke wih one or a few bonds is masked, yielding poenially confounded inferences. Thus, he VAR approach used in his conex may no reveal he informaion mos desired by raders; i.e. wheher here exiss a leas one bond consiuing an informaion based rading venue (a leas as soon as he equiy moves). Addiionally, we aemp o reconcile previous mixed findings by illusraing he imporance of accouning for hree more mehodological issues. Firs, since we observe rapid and informed bond rade immediaely afer corporae announcemens (ofen a leas as quickly as he sock rades), sudies ha employ sample runcaions excluding all bond and sock ransacions before he sock exchange officially opens may be biased owards ignoring he relaive efficiency of bonds. We illusrae how excluding pre-open rades 26 Gurun, Johnson and Markov (2008) find evidence of sock leads for equally weighed indices of daily bond reurns. However, informaion evens (sell side deb research repors) reduce he sock leads significanly. Also, Kwan (1996), who finds evidence of sock leads for bonds (using weekly quoe level daa), infers only ha socks lead in reflecing firm specific informaion. 23

creaes a poenially significan bias oward finding sock leads hereby reconciling some of he inferences previously obained. Second, we demonsrae he imporance of separaely addressing he reail and insiuional secors of he marke. Finally, we conduc VAR ess focused specifically around corporae earnings announcemens, when informaion effecs should be heighened. As in Hochkiss and Ronen (2002), Zhou (2006) and Downing, Underwood, and Xing (2007), we esimae a bi-variae VAR model o examine he iner-relaionship of bond and sock reurns, and conduc Granger-causaliy ess o idenify he lead-lag relaionships. The VAR model is esimaed as follows for each sock and he issuer s bond: and R s, R b, R R I L i i s, = s + βs, srs, i + γ s, brb, i + ε s, i= 1 i= 1 α, I L i i b, = b + βb, srs, i + γ b, brb, i + ε b, i= 1 i= 1 α, where ( ) represens he reurn on he sock (bond) a ime. The Akaike Informaion Crierion (AIC) deermines lag lengh choice. 27 Tess are conduced a boh he hourly and 15-minue reurn horizon frequencies. We presen he resuls using I=10 for he hourly regressions (and he comparable I=40 for he shorer horizons) for direc 27 Differen lag choices are considered, wih qualiaively similar resuls. Missing prices are backfilled o mainain full specificaion. Finally, he above analysis is consrained o daa from Ford and GM and as such is illusraive in naure. 24

comparison wih previous sudies. Each pair-wise comparison is conduced on he firm s sock and is mos liquid bond. 28 Table 10 presens Granger-causaliy ess of he null ha lagged bond (sock) reurns do no cause curren sock (bond) reurns for a pair of sock and bonds issued by Ford and GM. We begin wih a benchmark es in which we exclude all rades ouside exchange hours (as previously done in he lieraure) and find significan sock leads: hourly lagged sock reurns Granger-cause curren bond reurns bu no vice versa. For i example, for Ford, he p-value for he F-es of 0 β i [ 1,..., I ] b, s = is less han 0.0001 while he bond reurn is no found o Granger-cause he sock reurn a any reasonable level of significance. However, when we depar from his sample runcaion (and include off-exchange hour rades), and disinguish beween insiuional and reail sized rade sizes, inference reversals are obained, and he conclusion ha socks lead bonds disappears for he large sized bond rade sample. Specifically, we now find a wo way lead-lag relaionship, as he null hypohesis (ha lagged reurns of insiuional bond rades have no explanaory power for curren sock reurns) can be rejeced a he 1% level. This complemens our findings in he previous secion, ha large bond rades swifly incorporae new informaion and suggess ha he bond marke is no slower in incorporaing new informaion han he sock marke. While pas reail-sized bond reurns do no exhibi explanaory power for curren sock reurns in our sample, his does no aler our assessmen: If a leas some bond rades of a paricular issuing firm reac as quickly (or 28 Since inraday ineres raes are no available, we do no incorporae hem here. However, earlier sudies using longer horizons have found qualiaively similar resuls for reurns ha accoun for ineres rae movemens. 25

more rapidly) han he firm s equiy, he conclusion ha he enire bond marke is less efficien is premaure a bes. The illusraive example above ses he sage for he bi-variae VAR analysis ha we conduc on he full sample of all firms, for he 5 rading days following each earnings announcemen. We refrain from sample runcaion and also accoun for rade size. In addiion, we accoun for he shifing liquidiy paerns in bonds issued by he same firm. Each sock is mached wih he price leading bond following each earnings announcemen. The resuls indicae ha he informaional efficiency of he insiuional bonds is comparable o ha of he socks. Insiuional rades in bonds lead socks in 23.60% of all firm/earnings announcemens, while socks lead he insiuional bond rades in 23.47% of cases, a he 5% level. Resuls for he combined sample indicae bonds leading socks in 18.28% and socks leading bonds in 20.66%. 29 6. Concluding remarks While some schools of hough hold ha bond markes are inefficien, we find his conclusion o be premaure. Recen inroducions of reporing requiremens and ransparency o he over he couner corporae bond marke have resuled in rich daa ha can be employed o invesigae his issue fully. Such analysis requires careful aenion o he insiuional deails of he marke, as well as bond specific feaures. Recognizing he predominanly insiuional invesor base of his marke as well as he volume and iming of rades yields ineresing resuls regarding he informaional efficiency of he marke as a whole, as well as he relaive informaional efficiency wih he equiy marke. 29 Variance raio ess have been used in various conexs o assess marke efficiency. For our daa sample lenghs, small sample issues arise when bonds are no raded every day, rendering such analysis difficul a bes for he full sample of bonds. Longer daa periods could allow for such ess bu would involve adjusmen for predicable componens ha bond premia/discouns would imply. 26

Our resuls indicae ha he corporae bond marke is no necessarily slower han he equiy marke in processing informaion and ha i serves as an imporan venue for informaion-based rading, paricularly when sock marke liquidiy is low. In hose insances, bond rades are found o fully incorporae all informaion conen in earnings surprises before significan sock marke reacions occur. Of special ineres is our finding ha price leaders end o draw clusers of concenraed insiuional rade afer hese informaion evens. The shifing liquidiy across bonds issued by he same firm creaes a ag game beween price leaders, wherein each even may yield a new leader. Direc ess of bond price reacions o informaion reveal swif responses o earnings surprises a shor horizons, wih rapid incorporaion of all informaion. However, bi-variae VARs are also conduced, incorporaing bond marke feaures and yield no real evidence of one-way sock leads. We hus reconcile previously mixed resuls on his issue, illusraing ha socks are no necessarily faser in incorporaing firm specific informaion when appropriae liquidiy paerns and oher rade relaed feaures are accouned for. By quesioning he skepicism regarding he informaional efficiency of corporae bonds, his paper may carry imporan implicaions for regulaors, academics, capial srucure arbirageurs and oher invesors alike. Cerain policy quesions remain open. If opimal rading srucures are hose ha proec reail invesors as fully as heir insiuional counerpars, our resuls relaed o reporing ime changes can have relevance in revealing ha reail invesors may be bes served by coninued scruiny. Furher, if equiy and bond markes are informaion-inegraed (and if liquidiy in one marke affecs 27

rade in anoher), regulaion based effors should be direced owards boh markes simulaneously o be ulimaely effecive. 28

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Table 1: Characerisics of Sample Corporae Bonds and Issuing Firms This able conains descripive informaion abou he 8,678 bonds issued by he 66 firms in our sample. Financial Characerisics of he issuing companies are compiled from Compusa. Bond Characerisics are obained from Mergen FISD. A sraigh bond is defined as one ha has a fixed coupon rae and no embedded opions (callable, converible, puable, pay-in-kind, sinking fund provisions, or oher complexiies). Bonds issued wih mauriies of over 10 (under 3) years are classified as long (shor) erm bonds, wih he remainder defined as medium erm. Credi raing pariions are creaed by idenifying he number of bonds in a paricular raing a any given poin of ime wihin he sample period. Thus, he 8,678 bonds span a oal of 11,006 idenifiable bond raing poins. Issuer Toal Bond Offering Amoun Coupon Rae Original Mauriy Sraigh Issuer Toal Asses Liabiliies/Toal Composiion ($ Million) (%) (%) Bonds ($ Million) Asses # % Mean Median Mean Median Long Medium Shor % Mean Median Mean Median Whole Sample 8,678 194.32 14.81 5.11 5.35 43.10 44.61 12.30 37.73 148,979.58 40,587.50 0.81 0.80 AAA & AA 2,340 21.26 266.15 19.95 4.68 4.90 42.56 49.66 7.78 34.10 292,402.70 149,725.00 0.79 0.85 A 3,585 32.57 215.90 15.64 4.86 5.25 50.15 40.20 9.65 43.49 233,817.47 96,175.00 0.79 0.84 BBB 2,795 25.40 125.53 14.31 5.45 5.65 34.92 48.05 17.03 33.42 181,920.03 46,342.80 0.76 0.75 BB & Lower 2,158 19.61 116.82 15.48 5.87 6.00 37.30 46.20 16.50 38.04 151,897.22 14,523.75 0.91 0.85 32

Table 2: Percenage of Large and Small Trades in Corporae Bonds This able presens he relaive incidence of large and small rades, boh in erms of number of rades and rading volume. A rade is classified as large if i is $500,000.00 in par value or greaer. Percenages are calculaed for our sample as well as for he enire TRACE universe during he sample period (2003-2006). Bonds which are unraed (by S&P), or are in defaul are absen from credi raing pariions. TRACE volume is capped a $5($1) million for invesmengrade (high-yield) issues. Number of Trades Trading Volume All Trades Small Trades Large Trades All Trades Small Trades Large Trades (in 1000 s) (in 1000 s) as % of all (in 1000 s) as % of all ($ Billion ) ($ Billion) as % of all ($ Billion) as % of all TRACE Universe 17,042.80 13,564.60 79.59 3,478.20 20.41 7,729.45 659.62 8.53 7,069.83 91.47 Whole Sample 8,873.01 7,660.93 86.34 1,212.09 13.66 3,160.64 331.00 10.47 2,829.63 89.53 AAA & AA 1,803.53 1,567.24 86.90 236.29 13.10 663.57 75.16 11.33 588.41 88.67 A 2,717.41 2,330.91 85.78 386.50 14.22 1,099.01 108.59 9.88 990.42 90.12 BBB 2,382.21 2,040.92 85.67 341.29 14.33 1,054.16 81.93 7.77 972.23 92.23 BB & Lower 1,928.76 1,692.84 87.77 235.92 12.23 321.50 63.91 19.88 257.59 80.12 33

Table 3: Price Dispersions for Insiuional and Reail Trades This able presens pooled sample summary saisics for he dispersions of he ransacion prices for small and large bond rades, as well as he resuls from ess on he disance beween heir average price levels. We calculae for each bond/day he average price levels, price range (difference beween he highes and lowes prices wihin ha day divided by he average price level), and price dispersions (sandard deviaions of he inraday prices normalized by he average price level) for he small and large bond rades, respecively. The disance beween he average price levels for large rades (P large ) and small rades (P small ) is calculaed and sandardized by he midpoin, and -ess are conduced on he null ha he disance equals zero. Panel A conains he full sample period resuls, while Panel B provides he informaion for each reporing ime period. Panel C presens resuls for -ess on differences beween he average price dispersion, price ranges, and large-small price differences for he 593 bonds rading in boh he 75-minue and 15-minue reporing ime periods. Large Small T-es on H0: Price Dispersions (%) Price Range (%) Price Dispersions (%) Price Range (%) E( P large -P small )=0 Mean Median Sd Mean Median Sd Mean Median Sd Mean Median Sd Es(%) p-value obs. A. Whole Sample Period (January 1 s, 2003-December 31 s, 2006) Full Sample 0.18 0.08 0.53 0.42 0.17 1.26 0.72 0.57 0.67 2.35 1.73 2.28 0.55 <.0001 162,000 Invesmen-grade 0.15 0.07 0.32 0.34 0.14 0.73 0.65 0.52 0.57 2.09 1.55 1.98 0.47 <.0001 138,000 High-yield 0.33 0.21 0.47 0.86 0.51 1.41 1.11 0.99 0.82 3.86 3.36 3.05 0.95 <.0001 22,659 B. Differen Reporing Time Periods 75-Minue Reporing Time Period (January 1 s, 2003 - Sepember 30 h, 2003) 0.25 0.16 0.37 0.62 0.36 0.97 0.91 0.79 0.67 3.11 2.58 2.45 0.69 <.0001 26,122 45-Minue Reporing Time Period (Ocober 2nd, 2003 - Sepember 30h, 2004) 0.15 0.08 0.26 0.35 0.17 0.65 0.73 0.61 0.58 2.44 1.96 2.03 0.47 <.0001 31,760 30-Minue Reporing Time Period (Ocober 2nd, 2004 - June 30h, 2005) 0.15 0.07 0.27 0.38 0.14 0.78 0.63 0.48 0.54 2.25 1.58 2.28 0.39 <.0001 21,162 15-Minue Reporing Time Period (July 2nd, 2005 - December 30h, 2006) 0.13 0.05 0.41 0.30 0.10 0.85 0.56 0.41 0.50 2.04 1.35 2.09 0.37 <.0001 30.526 C. T-es on Differences beween 75-Minue and 15-Minue Reporing Time Periods esimae 0.12 0.32 0.35 1.06 0.32 p-value <.0001 <.0001 <.0001 <.0001 <.0001 34

Table 4: The Effecs of Earnings Announcemen on Small and Large Trades in Corporae Bonds We analyze he effec of earnings announcemen on corporae bond prices using he following pooled regression on a sample of 1469 bonds across 828 even days: ( ΔP / P) = α + β S + ε, where close ( P P close ) P close ( Δ P / P) = / close, and i measures he price changes from he previous days closing price o minues afer he earnings were released o public. S represens he surprise componen in he announcemen and is calculaed as S = ln( A) ln( F), following Hochkiss and Ronen (2002). Resuls are repored for all rade sizes, insiuional sized rades and reail sized rades using 05 million as he cuoff poin in panel A. Panel B provides robusness check of sensiiviy o various cuoff levels. *, **, and *** represen significance a he 10%, 5%, and 1% levels, respecively. Panel A: Using 0.5 million as he cuoff poin beween small and big rades Full Sample Small Trades Only Large Trades Only P/P (%) Es. p-value Adj R 2 (%) N. Es. p-value Adj R 2 (%) N Es. p-value Adj R 2 (%) N P 5 -P -close /P -close 0.11 0.2447 0.02 1,445-0.09 0.4266-0.03 1,273 0.51 <0.0001*** 11.57 467 P 10 -P -close /P -close 0.12 0.1910 0.05 1,490-0.06 0.5561-0.05 1,310 0.54 <0.0001*** 12.79 481 P 15 -P -close /P -close 0.14 0.1346 0.08 1,532-0.02 0.8326-0.07 1,338 0.50 <0.0001*** 10.66 508 P 20 -P -close /P -close 0.18 0.0480** 0.18 1,578 0.02 0.8138-0.07 1,373 0.55 <0.0001*** 11.74 527 P 25 -P -close /P -close 0.24 0.0054*** 0.41 1,631 0.08 0.4134-0.02 1,421 0.54 <0.0001*** 11.42 541 P 30 -P -close /P -close 0.23 0.0051*** 0.40 1,702 0.10 0.2505 0.02 1,471 0.54 <0.0001*** 10.74 568 P 45 -P -close /P -close 0.23 0.0017*** 0.46 1,924 0.13 0.1089 0.10 1,639 0.54 <0.0001*** 9.88 648 P 60 -P -close /P -close 0.29 <0.0001*** 0.73 2,141 0.19 0.0148** 0.28 1,793 0.51 <0.0001*** 7.97 743 P 75 -P -close /P -close 0.39 <0.0001*** 1.40 2,463 0.30 <0.0001*** 0.75 2,055 0.48 <0.0001*** 5.66 848 P 90 -P -close /P -close 0.33 <0.0001*** 0.99 2,810 0.24 0.0009*** 0.43 2,332 0.40 <0.0001*** 4.42 957 P 105 -P -close /P -close 0.33 <0.0001*** 0.96 3,282 0.28 <0.0001*** 0.63 2,735 0.42 <0.0001*** 3.96 1,077 P 120 -P -close /P -close 0.30 <0.0001*** 0.73 3,773 0.25 <0.0001*** 0.49 3,160 0.39 <0.0001*** 3.45 1,215 P 135 -P -close /P -close 0.30 <0.0001*** 0.71 4,345 0.26 <0.0001*** 0.52 3,677 0.35 <0.0001*** 2.53 1,370 P 150 -P -close /P -close 0.33 <0.0001*** 0.82 4,953 0.30 <0.0001*** 0.63 4,203 0.34 <0.0001*** 2.21 1,554 P 165 -P -close /P -close 0.33 <0.0001*** 0.81 5,589 0.30 <0.0001*** 0.63 4,787 0.32 <0.0001*** 1.81 1,700 P 180 -P -close /P -close 0.34 <0.0001*** 0.88 6,216 0.33 <0.0001*** 0.81 5,356 0.34 <0.0001*** 2.04 1,873 35

Panel B: Using oher cuoff poins: 0.1 million as he cuoff poin 0.25 million as he cuoff poin 1 million as he cuoff poin P/P (%) Small Trades Only Large Trades Only Small Trades Only Large Trades Only Small Trades Only Large Trades Only Es. N Es. N Es. N Es. N Es. N Es. N P 5 -P -close /P -close 0.00 1,101 0.16* 786-0.06 1,214 0.39*** 576-0.08 1,310 0.47*** 383 P 10 -P -close /P -close 0.00 1,133 0.21** 809-0.05 1,252 0.44*** 591-0.05 1,348 0.51*** 396 P 15 -P -close /P -close 0.04 1,155 0.17** 841 0.00 1,276 0.41*** 622-0.01 1,380 0.47*** 419 P 20 -P -close /P -close 0.07 1,193 0.22*** 860 0.04 1,312 0.45*** 639 0.03 1,416 0.52*** 435 P 25 -P -close /P -close 0.13 1,230 0.24*** 885 0.10 1,357 0.45*** 658 0.09 1,465 0.51*** 449 P 30 -P -close /P -close 0.16* 1,274 0.25*** 921 0.13 1,406 0.40*** 687 0.12 1,517 0.51*** 473 P 45 -P -close /P -close 0.17** 1,418 0.27*** 1,025 0.15* 1,570 0.42*** 770 0.16* 1,691 0.50*** 547 P 60 -P -close /P -close 0.19** 1,547 0.30*** 1,159 0.19** 1,716 0.44*** 876 0.26*** 1,859 0.57*** 634 P 75 -P -close /P -close 0.30*** 1,754 0.34*** 1,309 0.31*** 1,959 0.40*** 994 0.35*** 2,128 0.51*** 727 P 90 -P -close /P -close 0.24*** 2,000 0.34*** 1,465 0.26*** 2,229 0.33*** 1,115 0.28*** 2,428 0.43*** 821 P 105 -P -close /P -close 0.29*** 2,351 0.37*** 1,646 0.31*** 2,615 0.34*** 1,250 0.28*** 2,844 0.44*** 920 P 120 -P -close /P -close 0.24*** 2,729 0.39*** 1,844 0.26*** 3,025 0.34*** 1,402 0.26*** 3,286 0.42*** 1,030 P 135 -P -close /P -close 0.26*** 3,202 0.34*** 2,056 0.28*** 3,526 0.31*** 1,572 0.26*** 3,817 0.35*** 1,164 P 150 -P -close /P -close 0.31*** 3,666 0.35*** 2,322 0.31*** 4,032 0.34*** 1,783 0.30*** 4,358 0.36*** 1,320 P 165 -P -close /P -close 0.30*** 4,200 0.33*** 2,570 0.31*** 4,590 0.30*** 1,972 0.31*** 4,939 0.35*** 1,453 P 180 -P -close /P -close 0.37*** 4,705 0.29*** 2,845 0.35*** 5,145 0.27*** 2,174 0.34*** 5,518 0.37*** 1,594 36

Table 5: Speed of Adjusmen This able examines he speed a which earnings announcemens are fully incorporaed ino large 180 and small bond rades. We firs calculae for each bond ΔP / P), he price changes from minues o ( he end of hree hours following earnings announcemens, and hen run he following pooled regression separaely on insiuional and reail rades using 0.5 million as he cuoff poin: 180 ( ΔP / P) = α + β S + ε, where S represens he surprise componen in he announcemen as calculaed in Hochkiss and Ronen (2002). Resuls from using rades larger han 0.1 million, 0.25 million or 1 million are qualiaively similar. *, **, and *** represen significance a he 10%, 5%, and 1% level respecively. P/P(%) Es. p-value Adj R 2 N Panel A: Large Trades Only P 180 -P -close /P -close 0.34 <0.0001*** 2.04 1,873 P 5 -P -close /P -close 0.51 <0.0001*** 11.57 467 P 180 -P 5 /P 5-0.06 0.0997* 0.34 484 P 180 -P 10 /P 10-0.09 0.0183** 0.92 498 P 180 -P 15 /P 15-0.07 0.0788* 0.40 525 P 180 -P 20 /P 20-0.10 0.0175** 0.85 544 P 180 -P 25 /P 25-0.09 0.0268** 0.70 558 P 180 -P 30 /P 30-0.09 0.0287** 0.65 585 P 180 -P 45 /P 45 0.00 0.8817-0.15 665 P 180 -P 60 /P 60 0.01 0.7875-0.12 762 P 180 -P 75 /P 75 0.01 0.7241-0.10 867 P 180 -P 90 /P 90 0.01 0.6560-0.08 977 P 180 -P 105 /P 105-0.01 0.6595-0.07 1,098 P 180 -P 120 /P 120-0.02 0.4070-0.03 1,236 P 180 -P 135 /P 135-0.02 0.2985 0.01 1,392 P 180 -P 150 /P 150 0.01 0.6578-0.05 1,576 P 180 -P 165 /P 165 0.02 0.2224 0.03 1,723 Panel B: Small Trades Only P 180 -P -close /P -close 0.33 <0.0001*** 0.81 5,356 P 60 -P -close /P -close 0.19 0.0148** 0.28 1,793 P 180 -P 75 /P 75 0.10 0.0360** 0.16 2,089 P 180 -P 90 /P 90 0.08 0.0612* 0.11 2,366 P 180 -P 105 /P 105 0.08 0.0202** 0.16 2,770 P 180 -P 120 /P 120 0.07 0.0209** 0.14 3,196 P 180 -P 135 /P 135 0.03 0.3663 0.00 3,714 P 180 -P 150 /P 150 0.04 0.1050 0.04 4,243 P 180 -P 165 /P 165 0.00 0.7975-0.02 4,831 37

Table 6: TRACE Reporing Time and Price Informaiveness of Reail Corporae Bond Trades NASD members were originally required o repor all secondary marke bond ransacion hrough TRACE wihin 75 minues. This reporing ime decreases o 15 minues on July 1 s, 2005. We analyze how he changes in reporing ime affec he informaiveness of reail bond rades by running he following regression separaely on he 15-minue reporing period (July 2 nd, 2005-December 31 s, 2006) and pre 15-minue reporing period(january 1 s, 2003- June 30 h, 2005): ( ΔP / P) = α + β S + ε, where close ( P P close ) P close ( Δ P / P) = / close, and i measures he price changes from he previous days closing price o minues afer he earnings were released o public. S represens he surprise componen in he announcemen and is calculaed as S = ln( A) ln( F), following Hochkiss and Ronen (2002). *, **, and *** represen significance a he 10%, 5%, and 1% level respecively. P/P (%) Pre 15-minue reporing period 15-minue reporing period Es. p-value Adj R 2 (%) N Es. p-value Adj R 2 (%) N P 5 -P -close /P -close -0.03 0.9169-0.16 617-0.09 0.2928 0.02 657 P 10 -P -close /P -close -0.06 0.8153-0.15 640-0.04 0.6202-0.11 671 P 15 -P -close /P -close -0.07 0.7826-0.14 663 0.02 0.8241-0.14 676 P 20 -P -close /P -close 0.03 0.9140-0.14 684 0.04 0.6162-0.11 690 P 25 -P -close /P -close 0.00 0.9865-0.14 714 0.11 0.1261 0.19 708 P 30 -P -close /P -close 0.03 0.8964-0.13 753 0.13 0.0577* 0.36 719 P 45 -P -close /P -close -0.23 0.2886 0.01 858 0.22 0.0008*** 1.32 782 P 60 -P -close /P -close -0.10 0.6382-0.08 956 0.25 <0.0001*** 1.75 838 P 75 -P -close /P -close -0.13 0.5107-0.05 1,100 0.38 <0.0001*** 3.46 956 P 90 -P -close /P -close -0.02 0.9088-0.08 1,254 0.27 <0.0001*** 1.54 1,080 P 105 -P -close /P -close 0.01 0.9500-0.07 1,470 0.32 <0.0001*** 1.87 1,267 P 120 -P -close /P -close 0.21 0.2323 0.03 1,686 0.25 <0.0001*** 1.05 1,476 P 135 -P -close /P -close 0.41 0.0164** 0.24 1,970 0.24 <0.0001*** 0.88 1,709 P 150 -P -close /P -close 0.35 0.0373** 0.15 2,265 0.28 <0.0001*** 1.22 1,940 P 165 -P -close /P -close 0.28 0.0794* 0.08 2,564 0.30 <0.0001*** 1.31 2,225 P 180 -P -close /P -close 0.41 0.0070*** 0.22 2,872 0.33 <0.0001*** 1.57 2,486

Table 7: The Effecs of Earnings Announcemen on High-Yield vs. Invesmen-grade Bonds where This able repors he reacion o earnings announcemens from bonds of differen credi qualiies using he following regression: ( ΔP / P) = α + β S + ε, close ( P P close ) P close ( Δ P / P) = / close Panel A: Full Sample and Reail Sample Resuls Minues 5 10 15 20 25 30 45 60 75 90 105 120 135 150 165 180 I. Full Sample High-yield Es. 0.49*** 0.39** 0.36** 0.41** 0.44** 0.40** 0.40*** 0.45*** 0.51*** 0.29** 0.46*** 0.44*** 0.42*** 0.43*** 0.48*** 0.45*** N 60 69 75 85 92 102 130 156 203 256 330 412 472 556 641 706 Invesmen Grade Es. -0.12-0.10-0.12-0.07-0.03-0.01-0.12-0.06-0.04 0.04 0.02 0.00 0.12 0.12 0.13 0.17* N 1,379 1,415 1,451 1,487 1,533 1,594 1,788 1,978 2,253 2,546 2,943 3,351 3,860 4,382 4,932 5,494 II. Reail Trades High-yield Es. 0.10 0.08 0.13 0.14 0.21 0.25 0.33* 0.37** 0.35** 0.12 0.47*** 0.39*** 0.37*** 0.41*** 0.45*** 0.42*** N 48 57 61 67 72 77 98 116 164 206 278 356 413 491 573 635 Invesmen Grade Es. -0.09-0.12-0.12-0.06-0.05-0.02-0.18-0.07-0.08-0.04-0.06 0.02 0.18 0.13 0.10 0.20 N 1,219 1,247 1,271 1,300 1,343 1,388 1,535 1,671 1,885 2,120 2,451 2,798 3,258 3,706 4,208 4,713*, which measures he price changes from he previous days closing price o minues afer he earnings were released o public., and S=ln(A)-ln(F), which represens he surprise componen in he announcemen. Panel A conains he resuls using he full sample and reail sample for boh high-yield bonds and invesmen grade bonds. Panel B presens he resuls from he insiuional rades. We furher divided he rades on invesmen grade bonds ino several groups (i.e., A and higher, BBB downgraded wihin one year, BBB downgraded more han one year and BBB no downgraded in our sample), and he resuls are also repored separaely in Panel B. We use 0.5 million as he cuoff poin beween reail and insiuional sized rades. *, **, and *** represen significance a he 10%, 5%, and 1% level respecively.

Panel B: Insiuional Sized Trades Minues 5 10 15 20 25 30 45 60 75 90 105 120 135 150 165 180 High-yield Es. 0.95*** 0.98*** 0.94*** 1.00*** 0.92*** 0.82*** 0.71*** 0.54*** 0.47*** 0.34*** 0.32*** 0.34*** 0.27** 0.26*** 0.24** 0.25** N 29 30 33 37 40 45 57 73 82 93 102 110 123 140 150 161 Invesmen Grade Es. 0.04 0.11 0.10 0.11 0.12 0.24*** 0.31*** 0.38*** 0.40*** 0.34*** 0.42*** 0.33*** 0.32*** 0.40*** 0.37*** 0.38*** N 437 450 474 489 500 522 590 668 764 861 971 1,100 1,239 1,404 1,539 1,701 BBB-raed Es. 0.20* 0.29** 0.28*** 0.33*** 0.30*** 0.49*** 0.64*** 0.81*** 0.83*** 0.73*** 0.84*** 0.70*** 0.70*** 0.82*** 0.78*** 0.83*** N 163 170 184 193 198 213 246 278 317 351 388 430 468 513 543 577 No Downgraded Es. 0.08 0.08 0.07 0.13 0.06 0.15 0.38* 0.71** 0.69** 0.56** 0.77*** 0.74** 0.58** 0.65** 0.65** 0.58** N 106 107 108 113 115 123 136 151 165 188 215 239 263 290 307 330 Downgraded <=1 year Es 0.75 0.88* 0.79** 0.84** 0.74* 1.07** 0.86** 0.93*** 0.83** 0.76** 0.77** 0.61** 0.76*** 0.98*** 0.87*** 0.88*** N 31 34 39 40 42 45 54 59 67 73 77 86 92 105 115 121 > 1 year Es. -0.41-0.44-0.26-0.20 0.16 0.24 0.91** 0.78** 0.73* 0.78** 1.02** 0.79** 0.80* 1.04*** 0.97*** 1.36*** N 26 29 37 40 41 45 56 68 85 90 96 105 113 118 121 126

Table 8: Disinc Price Reacions of Insiuional and Reail Bond Trades o Good vs. Bad News This able repors he resuls from ess on he null hypohesis ha insiuional and reail bond rades reac indifferenly o good vs. bad informaion. We define an earnings announcemen as good (bad) news if he acual earnings are higher (lower) han he median forecas from final analyss. We keep all rades wihin one day following each earnings announcemen, and calculae for each bond/dae, he average price levels for insiuional and reail sized rades respecively. We hen conduc -ess on wheher he disance beween he average price for large rades in bonds (Plarge) and ha for small rades (Psmall) (normalized by he average price level) is significanly differen from zero following good news and bad news. *, **, and *** represen significance a he 10%, 5%, and 1% level. T-es on H0: E(Plarge-Psmall))=0 Mean (%) p-value Good News Lower Quarile Mean (%) Upper Quarile Mean (%) obs. T-es on H0: E(Plarge-Psmall))=0 Mean (%) p-value Bad News Lower Quarile Mean (%) Upper Quarile Mean (%) obs. Full Sample -0.100 (<.0001)*** -0.100-0.064 1,912 0.090 (0.0454)** 0.018 0.170 560 Invesmen-grade -0.100 (<.0001)*** -0.200-0.097 1,682-0.022 (0.5960) -0.100 0.060 367 BBB -0.300 (<.0001)*** -0.400-0.200 555 0.030 (0.7744) -0.100 0.200 112 A and Higher -0.046 (0.0307)** -0.087-0.042 1,127-0.043 (0.3504) -0.100 0.050 255 High-Yield 0.090 (0.3282) -0.091 0.270 223 0.300 (0.0032)*** 0.100 0.500 189

Table 9: Price Leader Characerisics This able presens characerisic informaion on he bond ha aracs mos of he insiuional rades ( op bond or price leader ) following earnings announcemen by each firm. Four alernaive cuoff poins beween small and large rades are applied o he daa and he resuls are presened in Panels A, B, C and D respecively. We provide he average share of large rades in he op bond from he earnings release ime o he following marke open, boh in erms on number of rades and dollar volume. We also calculae he percenage of imes ha he op bond has he longes mauriy among all bonds issued by he firm, is a long erm bond, is mos recenly issued, and has a leas one embedded opions, as well as he average iniial offering amoun. Long erm (Medium erm) bonds are defined as hose wih original mauriies of >10 (3-10) years. Number of Earnings Announcemens Top Bond s Share of Insiuional Trades Following Earnings Announcemens (%) Number of Trades Dollar Volume Top Bond Has he Longes Mauriy (%) Top Bond is a Long Term Bond (%) Top Bond is Mos Recenly Issued (%) Top Bond is Mos Recenly Issued Long Term Bond (%) Top Bond Has Embedded Opions (%) Top Bond Offering Amoun ($ Million) A. $500,000 as he cuoff poin Whole Sample 511 70.60 70.58 75.93 86.89 79.84 79.84 84.54 1,231.24 Firms wih only Invesmen-grade Bonds 382 70.57 70.52 76.18 87.43 93.98 82.98 81.94 1,303.12 Firms wih only High-yield Bonds 121 72.31 72.44 80.17 88.43 81.82 72.73 91.74 966.78 B. $100,000 as he cuoff poin 567 64.64 65.33 72.66 85.01 87.65 75.84 82.72 1,189.33 C. $250,000 as he cuoff poin 530 68.31 68.29 74.72 86.04 89.25 78.11 83.77 1,224.26 D. $1,000,000 as he cuoff poin 485 73.76 73.23 78.35 88.04 92.58 81.86 87.22 1,274.12

Table 10: Trade Size effecs on he lead-lag relaionships beween inraday sock and corporae bond reurns: This able repors he resuls from esimaion of he following bi-variae Vecor-Auoregressive model on he sock and one of he mos liquid bonds issued by Ford and GM: R s, R b, R I L i i s, = s + β s, s Rs, i + γ s, b Rb, i + ε s, i= 1 i= 1 I L b, b b, s s, i b, b b, i + ε b, i= 1 i= 1 i i α, and R = α + β R + γ R, where ( ) represens he reurn on he sock (bond) a ime. I=10 for regressions on hours reurns and I=40 for regressions on 15-minue reurns. We es he null hypoheses ha lagged bond (sock) reurns do no granger-causes curren sock (bond) reurns and he p-values for he ess are repored in he able. This es is conduced on various sub-samples o idenify he possible effecs of bond rade size on he lead-lag relaionship beween sock and bond reurns. Resuls for reurns calculaed on he hourly frequency and every 15 minues are presened in panel A and B respecively. *, **, and *** represen significance a he 10%, 5%, and 1% level. Ford GM Curren Sock Reurn Curren Bond Reurn Curren Sock Reurn Curren Bond Reurn Granger Tes Adj. R 2 (%) Granger Tes Adj. R 2 (%) N Granger Tes Adj. R 2 (%) Granger Tes Adj. R 2 (%) N A. Hourly Reurns Full Sample 0.2913 0.87 <0.0001*** 24.83 16,690 0.1797 1.09 <0.0001*** 22.97 16,617 Big Trades <0.0001*** 1.43 <0.0001*** 10.10 15,668 0.0008*** 1.57 <0.0001*** 6.29 13,857 Full Sample (excluding afer-hour rades) Big Trades (excluding afer-hour rades) B. 15-minue Reurns 0.4080 0.33 0.0002*** 16.07 12,313 0.6359 0.35 0.0037*** 16.36 12,967 0.0009*** 0.62 <0.0001*** 7.85 12,201 0.5073 0.43 <0.0001*** 3.97 11,188 Full Sample 0.2058 1.97 <0.0001*** 25.88 48,727 0.0411** 2.83 0.0180** 20.69 46,802 Big Trades <0.0001*** 2.67 <0.0001*** 7.53 41,690 0.0377** 3.55 <0.0001*** 3.65 38,202 Full Sample (excluding afer-hour rades) Big Trades (excluding afer-hour rades) 0.2286 0.76 <0.0091*** 22.09 41,103 0.4164 1.44 0.2111 18.44 40,724 0.0001*** 1.16 <0.0001*** 6.68 35,536 0.2007 1.76 <0.0001*** 2.39 33,583

Figure 1: Price behavior of small and large bond rades, as well as sock rades around earnings announcemens This figure depics he price behavior of small and large rades in a liquid corporae bond issued by Ford (CUSIP: 345370CA6) or GM (CUSIP: 370442BT1), as well as heir socks around a ypical earnings announcemen day. We plo he price movemens of hese securiies from one day before he earnings were released o he public ill he day afer. Bond prices are ploed agains he lef verical axis and sock prices are ploed agains he righ one. Small bond rades, large bond rades, and sock rades are represened by he red line, he black line and he blue line respecively. FORD (April 16 h, 2003) GENERAL MOTERS (July 26 h, 2006) A. Using 0.5 million as he cuoff poin: Bon d Pr i ce S ock Pr i ce Bond Pr i ce 92 10. 0 87 34 91 86 90 89 88 9. 5 85 84 33 87 86 83 32 85 9. 0 82 84 81 83 80 31 82 81 80 8. 5 79 78 30 79 77 78 8. 0 15APR03: 00: 00: 00 15APR03: 12: 00: 00 16APR03: 00: 00: 00 16APR03: 12: 00: 00 17APR03: 00: 00: 00 17APR03: 12: 00: 00 18APR03: 00: 00: 00 daeime B. Using 0.25 million as he cuoff poin: Bond Pr i ce S ock Pr i ce 76 29 25JUL06: 00: 00: 00 25JUL06: 12: 00: 00 26JUL06: 00: 00: 00 26JUL06: 12: 00: 00 27JUL06: 00: 00: 00 27JUL06: 12: 00: 00 28JUL06: 00: 00: 00 da e i me Bond Pr i ce S ock Pr i ce 92 10. 0 87 34 91 90 9. 5 86 89 85 33 88 84 87 86 9. 0 83 32 85 8. 5 82 84 81 83 8. 0 80 31 82 79 81 80 7. 5 78 30 79 77 78 7. 0 76 29 15APR03: 00: 00: 00 15APR03: 12: 00: 00 16APR03: 00: 00: 00 16APR03: 12: 00: 00 17APR03: 00: 00: 00 17APR03: 12: 00: 00 18APR03: 00: 00: 00 da e i me 25JUL06: 00: 00: 00 25JUL06: 12: 00: 00 26JUL06: 00: 00: 00 26JUL06: 12: 00: 00 27JUL06: 00: 00: 00 27JUL06: 12: 00: 00 28JUL06: 00: 00: 00 da e i me

Figure 2: Trading Frequencies in Socks and Corporae Bonds The figure describes rading aciviies in socks and corporae bonds around earnings announcemens. Number of rades in he sock is represened by he purple line and is ploed agains he righ verical axis. Toal number of rades, number of small rades, and number of large rades in a liquid corporae bond are represened by he blue line, he black line and he red line respecively and are ploed agains he lef verical line. The verical green line in he figures denoes he ime when earnings are released o he public. Ford Number of Tr ades i n Bonds Number of Tr ades i n S ocks 8 400 7 6 300 5 4 200 3 2 100 1 0 0 Earni ngs Annoucemen

General Moors 13 500 12 11 10 400 9 8 300 7 6 5 200 4 3 2 100 1 0 0 Ear ni ngs Annoucemen

Figure 3: Average Daily Trading Frequency and Volume Per Bond This figure presens average daily number of rades (Panel A) and average daily rading volume (Panel B) for all bonds over he sample period (2003-2006). During his period, ransacion reporing ime for NASD members was decreased from 75 o 45 minues on Ocober 1, 2003, furher reduced o 30 minues on Ocober 1, 2004, and finally o 15 minues in July 1, 2005. We focus on he sample of bonds whose ransacion informaion is subjec o immediae dissipaion hroughou he whole sample period. Panel A: Daily Number of Trades Per Bond (2003-2006) Number of Large Trades Number of Small Trades 25 20 Number of Trades 15 10 5 0 2003-1-2 2003-3-2 2003-5-2 2003-7-2 2003-9-2 2003-11-2 2004-1-2 2004-3-2 2004-5-2 2004-7-2 2004-9-2 2004-11-2 2005-1-2 2005-3-2 2005-5-2 2005-7-2 2005-9-2 2005-11-2 2006-1-2 2006-3-2 2006-5-2 2006-7-2 2006-9-2 2006-11-2 Dae Panel B: Daily Trading Volume Per Bond (2003-2006) Large Trade Volume Small Trade Volume 18000000 16000000 14000000 12000000 10000000 8000000 6000000 4000000 2000000 0 2003-1-2 2003-3-2 2003-5-2 2003-7-2 2003-9-2 2003-11-2 2004-1-2 2004-3-2 2004-5-2 2004-7-2 2004-9-2 2004-11-2 2005-1-2 2005-3-2 2005-5-2 2005-7-2 2005-9-2 2005-11-2 2006-1-2 2006-3-2 2006-5-2 2006-7-2 2006-9-2 2006-11-2 Volume Dae