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Unexpected defaults: the role of information opacity

Author

Listed:
  • Aytekin Ertan

    (London Business School)

  • Yun Lee

    (Singapore Management University)

  • Regina Wittenberg-Moerman

    (University of Southern California Marshall School of Business)

Abstract

Bond defaults are undesirable yet natural outcomes of risky investments. What is also crucial but hitherto underexplored is the unexpectedness of defaults. We develop a parsimonious measure of default unexpectedness and highlight its economic importance by demonstrating that unexpected defaults are associated with unfavorable recovery outcomes and adverse price changes in peer firm bonds. We then examine how default unexpectedness relates to information opacity. We find that firms with opaque financial reporting and weak voluntary disclosure experience more unexpected defaults. Defaults also occur more unexpectedly when the external information environment is opaque—when rating agencies disagree on a firm’s credit risk and when the media coverage is low. We further report evidence on a specific case in which transparent firms suffer unexpected defaults—when creditors’ run incentives are particularly high. Overall, our paper introduces default unexpectedness as an economically relevant construct, offers a tractable measure, and highlights the role of transparency in mediating this phenomenon.

Suggested Citation

  • Aytekin Ertan & Yun Lee & Regina Wittenberg-Moerman, 2025. "Unexpected defaults: the role of information opacity," Review of Accounting Studies, Springer, vol. 30(1), pages 899-949, March.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:1:d:10.1007_s11142-024-09842-8
    DOI: 10.1007/s11142-024-09842-8
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    More about this item

    Keywords

    Bond defaults; Recovery; Information opacity; Financial reporting; Voluntary disclosure; Information environment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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