What Does the Corporate Bond Market Know?

Do related markets reflect new information simultaneously? For high-yield bonds, a large abnormal price decline in a corporation's most liquid bond over a month is followed by an average abnormal stock price decline of −1.42%. This effect is larger for stocks that have increased in value and for volatile stocks. It is also larger for bonds with high coupons and shorter maturities. These results support the view that high-yield corporate bonds have an informational edge when news is negative and stock returns are noisy, and add to the growing literature on the substantial lags in price discovery between related markets.