Does the bond market fully reflect the value of intangibles?

Sammanfattning: This paper examines how the bond market reflects the value of an intangible, more specifically the value of employee satisfaction. Prior research has found support for a mispricing of information on employee satisfaction in the equity market. As stocks and bonds are contingent claims on the same underlying cash flows and firm value, the same information would be expected to affect the valuation of both securities. Thus is of interest to understand whether this finding extends to the bond market. For this purpose, an event study approach was adopted to capture both the short-term and long-term reaction to the announcement of Fortune Magazine's '100 Best Companies to Work For' list in the US. The list is a highly public and salient measure of employee satisfaction and comprises an output measure on the quality of an intangible: human capital. The sample comprises 353 firm-year observations on the announcement of the list on 78 firms over the period 2003-2021. We find no statistically significant abnormal returns to the announcement of the list. The results are evident both in the short horizon and the long-run horizon. We offer multiple interpretations for this but argue that the most plausible explanation is that higher employee satisfaction as indicated by list inclusion is immediately incorporated in bond prices. This because bond investors perceive high employee satisfaction as a valid signal on the risk profile and financial capability of the firm. We attribute the contradiction of our findings with the ones in the equity market to the difference in pay-off structure between bondholders and equity holders - where bondholders are more concerned with limiting the downside risk.