Impact of audit quality, analysts' forecasts and new accounting pronouncements on bond pricing and investment: an empirical analysis

Guan, Yanling (2007) Impact of audit quality, analysts' forecasts and new accounting pronouncements on bond pricing and investment: an empirical analysis. Doctoral thesis, University of London: London Business School.

Abstract

This thesis, which consists of five chapters, examines the impact of pension accounting standard, auditor independence, and analysts' forecasts on the allocation of corporate pension assets to bonds and the pricing of corporate bonds. Chapter 1 outlines the research motivation and briefly summarizes the major findings. Chapter 2 investigates whether the introduction of the new pension accounting standard FRS 17 in the UK affects corporate pension assets allocated to bonds. The results show that UK companies shifted pension assets from equities to bonds during the transitional period of FRS 17, although in the same period US companies exhibited a slightly decreasing allocation to bonds. Moreover, firms that are more vulnerable to FRS 17 volatility have shifted more pension assets from equities to bonds. Finally, the above findings apply to both those UK firms that only disclosed in accordance with FRS 17 and those UK firms that fully adopted FRS 17 during the transitional period. Chapter 3 examines the effect of auditor independence on the rating and pricing of corporate bonds. The results show that higher external auditor independence is associated with better bond ratings and lower yield premium. The findings suggest that independent auditors lead to greater accounting conservatism and thus reduced cost of borrowing. The fourth chapter investigates the effects of analysts' forecasts on the pricing of corporate bonds. I find that earnings forecast and cash flow forecast are significantly and negatively associated with the bond yield premium after controlling for categorical bond ratings and fundamental financial ratios. Moreover, such association is stronger when the perceived default risk or information asymmetry is higher. I conclude that bond investors extract relevant information from analysts' forecasts to assess default risk over and above the categorical bond ratings in pricing corporate bonds. The last chapter concludes. I