BOND AND STOCK-MARKET RESPONSE TO UNEXPECTED EARNINGS ANNOUNCEMENTS

This study examines whether earnings changes convey information in bon d markets and finds a significant positive (negative) reaction to unex pected earnings increases (decreases). The results are consistent whet her earnings announcements precede or follow dividend announcements. T hus, earnings surprises convey information to bond markets and changes in firm value are split among bondholders and stockholders. This is i n contrast to evidence from studies examining unexpected dividend anno uncements where bond price reaction is asymmetric. Cross-sectional ana lysis reveals that bond excess returns are positively related to earni ngs surprises.