Abstract
Bond defaults are undesirable yet natural outcomes of risky investments. What is also crucial but hitherto underexplored is the unexpectedness of defaults. We develop a parsimonious measure of default unexpectedness and highlight its economic importance by demonstrating that unexpected defaults are associated with unfavorable recovery outcomes and adverse price changes in peer firm bonds. We then examine how default unexpectedness relates to information opacity. We find that firms with opaque financial reporting and weak voluntary disclosure experience more unexpected defaults. Defaults also occur more unexpectedly when the external information environment is opaque—when rating agencies disagree on a firm’s credit risk and when the media coverage is low. We further report evidence on a specific case in which transparent firms suffer unexpected defaults—when creditors’ run incentives are particularly high. Overall, our paper introduces default unexpectedness as an economically relevant construct, offers a tractable measure, and highlights the role of transparency in mediating this phenomenon.
| Original language | English (US) |
|---|---|
| Article number | 105237 |
| Pages (from-to) | 899-949 |
| Number of pages | 51 |
| Journal | Review of Accounting Studies |
| Volume | 30 |
| Issue number | 1 |
| DOIs | |
| State | Published - Mar 2025 |
Funding
We thank Russell Lundholm (the Editor), an anonymous reviewer, Stefan Anchev, Sudipta Basu, Sanjay Bissessur, Wai Fong Chua, Carlos Corona, Maria Correia, Ed deHaan, Ron Dye, Annita Florou, Pouyan Ghazizadeh, John Christian Langli, Andy Leone, Yun Lou, Mihir Mehta, Brian Mittendorf, Leila Peyravan (discussant), Stephen Penman, Peter Pope, Georg Rickmann, Darren Roulstone, Sugata Roychowdhury, Stephen Schaefer, Baljit Sidhu, Ewa Sletten, Sri Srinivasan, Florin Vasvari, David Veenman, Roberto Vincenzi, Beverly Walther, Wei Wang, Daniel Yang, Liandong Zhang, and seminar and conference participants at the American Accounting Association Annual Meeting, Amsterdam Business School, BI Norwegian Business School, Bilkent University, Bocconi University, British Accounting and Finance Association Annual Conference, Northwestern University, the Ohio State University, Temple University, and the University of Sydney for helpful comments and suggestions. Ertan acknowledges financial support from the London Business School RAMD Fund.
Keywords
- Bond defaults
- Financial reporting
- Information environment
- Information opacity
- Recovery
- Voluntary disclosure
ASJC Scopus subject areas
- Accounting
- General Business, Management and Accounting