The informational efficiency of bonds and stocks: The role of institutional sized bond trades

We compare the informational efficiency of bond and stock markets. For speculative-grade firms, we find a higher degree of response to earnings surprises from institutional bond trades than from retail bond trades, but we don't see evidence that institutional bond trades react more quickly than retail bond trades. Bond trades are slower than stock trades in reacting to earnings surprises. Over the entire sample period, we find that for speculative-grade firms, the predictability of stock returns by bond returns can be improved when only institutional bond trades are considered. The observation, however, does not hold for investment-grade firms.