Ds. Dhaliwal et Ss. Reynolds, THE EFFECT OF THE DEFAULT RISK OF DEBT ON THE EARNINGS RESPONSE COEFFICIENT, The Accounting review, 69(2), 1994, pp. 412-419
The objective of this study is to examine the effect of the default ri
sk of debt on the relation between accounting earnings and stock retur
ns. Recent research suggests that measurements of equity beta do not c
apture all dimensions of riskiness of equity. The default risk of debt
may help explain how accounting earnings are linked to stock returns
because the default risk of debt may capture some elements of riskines
s of equity that are not captured by equity beta. We document empirica
lly that the coefficient relating unexpected changes in earnings to ab
normal stock returns (the earnings response coefficient or ERC) is neg
atively related to the default risk of debt as measured by bond rating
s.