Corporate bond prices and idiosyncratic risk: Evidence from Australia

• Sample covers 208 weeks from July 1998 to June 2010 on 117 bonds in Australia.
• The magnitude of firm-level idiosyncratic risk does not affect bond prices.
• Same-direction bond price change with idiosyncratic dispersion at one-week lag.
• Most pronounced for financial, decreasing leverage, increasing size and M/B firms.
• One-week lag implies time for bond traders for bond trading.

In this paper we investigate the bond price effect upon the information arrival of firm-specific idiosyncratic risk. We consider idiosyncratic dispersion and idiosyncratic volatility that capture, respectively, the direction of information and the magnitude of idiosyncratic risk. We find that idiosyncratic volatility does not affect bond prices, while the direction of idiosyncratic risk which reflects the favorable or unfavorable information exhibits impacts on bond prices. Idiosyncratic dispersion in the stock return of a firm in the preceding week, in general, is positively associated with bond price changes in the current week. This effect is most pronounced for firms exhibiting characteristics associated with lower default risk.