Author(s): Kyongsun Heo, Sara Ryoo
This study investigates whether an issuer’s accounting reporting attributes have impact on the initial returns of bond offerings in emerging markets of Korea. In particular, we focus on the critical role of accounting conservatism on corporate straight bond pricing. Empirical results show that in general the initial returns for newly issued bonds tend to be negative (overpriced). More importantly, the degree of overpricing positively relates to the level of conditional accounting conservatism, suggesting that accounting conservatism mitigates information asymmetry in public debt financing. In addition, we find that this effect is more pronounced for bond issuances with poor credit ratings. It indicates that conservative accounting in the form of timely profit (or loss) recognition improves contracting efficiency in debt market by reducing cost of debt capital. This study addresses an important gap in the literature by building richer insights on how the approach to accounting policies determine the pricing strategy of corporate bonds at an early stage in condition to the focal firm’s credit risk.