Rice research on bond and stock market differences, earnings variations

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As corporate debt markets continue to grow in importance, it will become crucial for investors and regulators to understand the nuanced factors influencing their liquidity. Photo via Getty Images

At the end of every quarter, publicly traded companies announce their profits and losses in an earnings report. These updates provide insight into a company’s performance and, in theory, give investors and shareholders clarity on whether to buy, sell or hold. If earnings are good, the stock price may soar. If they’re down, the price might plunge.

However, the implications for the stock price may not be immediately clear to all investors. In the face of this uncertainty, sellers will ask for high prices, and buyers will offer low ones, creating a significant “bid-ask spread.” When this happens, it becomes more costly to trade, and the stock becomes less liquid.

This is a well-documented effect on equity stock markets. However, according to research by Stefan Huber (Rice Business), Chongho Kim (Seoul National University) and Edward M. Watts (Yale SOM), the corporate bond market responds differently to earnings news. This is because bond markets differ from stock markets in a significant way.

Stocks v. Bonds: What Happens When Earnings Are Announced?

Equities are usually traded on centralized exchanges (e.g., New York Stock Exchange). The exchange automatically queues up buyers and sellers according to the quote they’ve entered. Trades are executed electronically, and the parties involved are typically anonymous. A prospective buyer might purchase Microsoft shares from someone drawing down their 401(k) — or they could be buying from Bill Gates himself.

Corporate bond markets work differently. They are “over-the-counter” (OTC) markets, meaning a buyer or seller needs to find a counterparty to trade with. This involves getting quotes from and negotiating with potential counterparties. This is an inherent friction in bond trading that results in much higher costs of trading in the form of wider bid-ask spreads.

Here’s what Huber and his colleagues learned from the research: Earnings announcements prompt many investors to trade. And on OTC markets, potential buyers and sellers become easier to find and negotiate with.

A Stronger Bargaining Position for Bonds

According to Huber, “When earnings information comes out, a lot of people want to trade. In bond markets, that makes it much easier to find someone to trade with. The more options you have to trade, the stronger your bargaining position becomes, and the lower your trading costs go.”

He compares the process to shopping in a market with a flexible approach to pricing.

“Let's say you're at a farmers market and you want to buy an apple,” Huber says. “If there is only one seller, you buy the apple from that person. They can ask for whatever price they want. But if there are multiple sellers, you can ask around, and there is potential to get a better price. The price you get depends on the number of options you have in trading partners.”

What’s at Stake?

Although bonds receive less attention than equities, the stakes are high. There is about $10 trillion in outstanding corporate debt in the U.S., and more than $34 billion in average daily trading volume.

A detailed record of bond trades is available from the Financial Industry Regulatory Authority (FINRA), which requires that trades be reported via their Trade Reporting and Compliance Engine (TRACE).

The study from Huber and co-authors uses an enhanced version of TRACE to examine trades executed between 2002 and 2020. The team analyzed the thirty-day periods before and after earnings announcements to gather data about volume, bid-ask spreads and other measures of liquidity.

They find that, like on the stock market, there are more investors and broker-dealers trading bonds around earnings announcements. However, unlike on the stock market, transaction costs for bonds decrease by 6 to 7 percent in the form of bid-ask spreads.

What Sets This Research Apart?

“Taking a purely information asymmetry-based view would predict that what happens to stock liquidity would also happen to bonds,” Huber says. “A piece of information drops, and some people are better able to work with it, so others price protect, and bid-ask spreads and the cost of trading go up.”

“But if you consider the search and bargaining frictions in bond markets, you get a more nuanced picture. While information asymmetry increases, like it does on stock markets, the information prompts more investors into bond trading, which makes it easier to find counterparties and get better transaction prices. Consequently, bid-ask spreads go down. This search and bargaining friction does not really exist on equities exchanges. But we cannot ignore it in OTC markets.”

As corporate debt markets continue to grow in importance, it will become crucial for investors and regulators to understand the nuanced factors influencing their liquidity. This study provides a solid foundation for future research.

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This article originally ran on Rice Business Wisdom. For more, see “Earnings News and Over-the-Counter Markets.” Journal of Accounting Research 62.2 (2024): 701-35.

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People's Choice: Pick your startup of the year for the 2024 Houston Innovation Awards

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It's firmly voting season in Houston, and in addition to deciding the nation's next political leaders, the local innovation ecosystem is being called to weigh in on one category for the Houston Innovation Awards.

This year's People's Choice: Startup of the Year voting is officially open online. Read about each company below, then click here to cast your vote. You may vote once per day up until Nov. 8 when the portal closes. The winner will be named at the Nov. 14 event — click here to secure your ticketto see who wins in this and the other dozen categories.

Corrolytics

Founded by CEO Anwar Sadek, this minority-owned startup uses its patented electrochemical technology to detect and monitor corrosion. Unlike others in the market, Corrolytics allows for on-site, real-time, accurate detection of corrosion, helping to safeguard industrial assets and prolong their lifespans.

Last month, Corrolytics, which is also a finalist in the Minority-Founded Business category, was named among the most promising energy tech startups at the Rice Alliance for Technology and Entrepreneurship's Energy Tech Venture Forum and won the People's Choice Award. It was part of the Rice Alliance Clean Energy Accelerator earlier this year.

What significant milestone(s) has your company reached this year?

We launched our comprehensive in-lab services in Q4 of 2023, generating $100,000 in revenue. By 2024, we tripled our revenue, confirming our early product-market fit while serving four major customers in the energy sector. With the ruggedization and scalable design of our test kit now complete, we’re set to begin field trials in the next quarter. Additionally, Corrolytics has secured a Joint Development Agreement with a leading oil and gas service provider, extending our reach across the global energy market.

What advice do you wish you could tell yourself before you started your company?

Embrace the challenges early on, as they are invaluable learning opportunities. Focus on building a strong network, especially with mentors and industry leaders who can guide you through the unknowns. Lastly, be prepared for the unexpected, stay adaptable and never underestimate the importance of a clear mission that inspires both your team and your customers.

Why did you choose Houston for your company's headquarters and how has your experience been growing a company here?

Houston is the energy capital of the world, providing unparalleled access to major industry players, talent and resources. The city's strong focus on innovation and its thriving clean energy ecosystem has been a perfect fit for Corrolytics. Growing the company here has been an amazing experience—Houston’s vibrant startup community, world-class accelerators like the Rice Alliance, and its strategic location have accelerated our growth and opened doors to invaluable partnerships. Houston truly offers the ideal environment for scaling a cleantech startup like ours and advancing the future of sustainable energy.

FlowCare

FlowCare is focused on addressing menstrual inequity by providing flagship dispensers stocked with free, 100 percent organic pads and tampons for schools and businesses, while raising awareness about the issues that impacks millions.

The startup was founded in January and is led by Founder and CEO Tanu Jain.

What significant milestone(s) has your company reached this year?

Here’s a summary of the significant milestones FlowCare has reached this year:

  • Building a supportive community: We’ve established a vibrant community of FlowCare cheerleaders and advisors who are passionate about our mission.
  • Newsletter Success: Our newsletter, launched just two months ago, now reaches 2,000 people each month with an impressive 50 percent to 60 percent open rate. We’ve also been moved by the personal stories of period struggles shared by our readers.
  • Competition Achievements: We secured fourth place in the Houston Community College Business Plan Competition, winning $1,000 and raising awareness about period product accessibility. FlowCare also earned a top four finish out of 200 participants in the TiE Dallas Global Pitch Competition.
  • Successful Pilot at ION: We’ve commenced a paid pilot with ION, receiving heartfelt text messages from women expressing how FlowCare has positively impacted their day and alleviated embarrassment by providing period products in restrooms."

What advice do you wish you could tell yourself before you started your company?

Expect the journey to be challenging and more time-consuming than anticipated. You’ll face financial struggles and setbacks, but remember to stay patient and resilient. Embrace the journey and find joy in the small victories along the way. Build a network of supportive individuals who believe in your mission and can help you navigate the tough times. You’ll experience self-doubt and imposter syndrome, but remember, even high-profile leaders experience these feelings. Stay focused on your mission and trust in your ability to make a difference.

Why did you choose Houston for your company's headquarters and how has your experience been growing a company here?

I chose Houston for FlowCare’s headquarters because it’s home to me—having grown up here, it felt natural to build my company in a place I know and love. My experience growing the company here has been incredibly positive. Houston boasts a strong and supportive community with a robust network of individuals who are always willing to help. As an entrepreneur, having access to people who are willing to spend time with you, offer guidance, and introduce you to the right connections is invaluable. The local support has been a key factor in keeping us going towards the mission of period equity.

InnoVent Renewables

InnoVent Renewables is a circular economy business that has developed a proprietary net-zero process that converts waste tires, plastics, and biomass into fuels and chemicals. It estimates that it will reduce emissions by 80 million pounds when its production facility is operating.

InnoVent was founded by chemical-engineer-turned-CEO Vibhu Sharma in 2023. It has plans for aggressive growth across North America and Latin America.

What significant milestone(s) has your company reached this year?

We started our business in July 2023, raised a "friends and family" round, which was oversubscribed, and we carry no debt. We went from concept to the commissioning stage in 14 months and will start full commercial operations in Q4 2024.

What advice do you wish you could tell yourself before you started your company?

Always raise more cash than you think you will need. We raised a friends and family round and then had to tap that network again to get some additional funds to account for some add-ons and escalations.

Why did you choose Houston for your company's headquarters and how has your experience been growing a company here?

Houston is a remarkably affordable city with exceptional talent and expertise in engineering, design, renewables, and oil and gas processes. In addition, we were able to tap an excellent and experienced advisory board that has been guiding us. Houston is well connected with the rest of the world, as well as easy access to Monterrey, Mexico, where our tire facility is located.

MendIt

MendIt Inc. was founded in 2019 to help quickly and easily connect users with small businesses and non-profits that can mend and repair clothing sustainably.

It is led by CEO and founder Kaitlyn Allen and was a member of the gBETA Houston accelerator in 2023.

What significant milestone(s) has your company reached this year?

We are finally in the feasibility phase of our (stealth) B2B offering for brands and are excited that the initial results are positive and are pointing to scalability. We are currently in the process of contracting to provide our solution for two initial B2B customers.

What advice do you wish you could tell yourself before you started your company?

Seek product-market fit from the beginning (rather than product-problem fit), and don’t invest so much before that is demonstrated.

Why did you choose Houston for your company's headquarters and how has your experience been growing a company here?

We founded MendIt in Houston because it is our hometown and where we lived. It’s been interesting growing a non-energy-related company because so many of the resources are focused on that sector, and at the same time we get to stand out as the only “tech” startup focused on fashion and textile sustainability.

Passport Journeys

Passport Journeys is a teletherapy app that's specifically designed for mother-daughter pairs. The app launched on Mother's Day 2023 and provides users with personalized therapies, journal opportunities, interactive worksheets and intentional bonding activities.

The company is led by founder and CEO Lacey Tezino.

What significant milestone(s) has your company reached this year?

This year, we’ve achieved several significant milestones: We filed for a trademark to protect our brand, applied for our first NIH SBIR grant to secure funding for our innovative teletherapy app, and launched a nonprofit arm to provide free therapy to those in need, demonstrating our commitment to both innovation and community support.

What advice do you wish you could tell yourself before you started your company?

I would advise myself to secure funding and the sustainability plan for the first five years before leaving the big corporate job.

Why did you choose Houston for your company's headquarters and how has your experience been growing a company here?

We chose Houston for our company’s headquarters due to its vibrant and diverse community, robust health care and tech sectors, and supportive entrepreneurial ecosystem. Growing our company here has been a rewarding experience, marked by strong local partnerships, access to a large talent pool, and a dynamic business environment that fosters innovation and collaboration. The city’s emphasis on healthcare and technology aligns well with our mission, providing a solid foundation for our growth and impact.

TrueLeap

Ed-tech startup TrueLeap Inc. aims to address the global education gap by providing affordable, scalable digital tools to educators in emerging markets through its e-learning platform.

Founded in 2022, it raised $610,000 in a pre-seed round earlier this year, which was over its target of $500,000. It's led by co-founders Sandip Bordoloi, who serves as CEO, and Sunny Zhang, the company's Chief Evangelist. Dario Calogero, founder and CEO of Maya Investments Limited, which led the round, was recently named to the company's board of directors.

True Leap is being developed out of Born Global Ventures, a Houston venture studio focused on advancing immigrant-founded technology, of which Zhang is a founding partner. It serves educators in schools in the United States, India, the Democratic Republic of Congo and other countries.

What significant milestone(s) has your company reached this year?

Advancing our mission to make education accessible to underserved communities worldwide, we have reached the following milestones:

1. New country entry into Ghana by partnering with International Business and Opportunity Network (IBON)
2. Expanded implementation in the DRC by partnering with the Catholic School Association
3. New product launch enabled global educators and institutions to create and distribute high-quality content to prepare global talents for success.

What advice do you wish you could tell yourself before you started your company?

Just do it.

Why did you choose Houston for your company's headquarters and how has your experience been growing a company here?

We chose Houston for its diversity and international connections, which align with our mission to expand access to education worldwide. The city's supportive startup scene, access to top talent, and thriving innovation ecosystem have made it an ideal place to grow TrueLeap.

Pick your 2024 Houston Startup of the Year.

Houston software company makes strategic acquisition, aims to claim unicorn status

gearing up

Houston cloud-based shop management system company Tekmetric is joining forces with customer relationship management leader for auto repair shops Shopgenie.

Tekmetric will be positioned to be the first auto repair technology platform to achieve unicorn status.

“This combination sets a new standard for efficiency and customer experience in the industry,” Sunil Patel, founder and CEO of Tekmetric, says in a news release. “At Tekmetric, we are committed to providing shop owners with best-in-class tools to manage and grow their businesses. Similarly, Shopgenie’s ability to solve real-world challenges with intuitive technology has earned it the trust of shop owners nationwide.”

Shopgenie’s CRM and customer experience tools and Tekmetric’s shop management solutions will combine to provide a platform across North America. The collaboration will “empower shop owners to streamline operations, manage communication and build stronger customer relationships—all from a single, unified platform,” according to a news release.

Both companies over the next few months, will begin to integrate features from both platforms into a single unified system with one platform, a single login and one phone number for customer communications.

“Tekmetric’s relentless pursuit of innovation and passion for creating products that make shop owners’ lives easier could not be a more perfect fit for Shopgenie and our customers,” Kieran O’Brien, CEO and co-founder of Shopgenie, adds. “Our combined strengths will create a more complete, powerful platform that sets a new standard for auto repair software solutions.”

With the collaboration, shops will have the continued flexibility to leverage over 70 integrations in Tekmetric’s integration ecosystem, while Shopgenie will continue to build and support integrations with other shop management systems. Tekmetric currently serves more than 8,000 shops nationwide, and Shopgenie has over 2,000 customers.

“Together, we are building an all-in-one platform that empowers shop owners to attract, retain and serve customers more effectively, driving long-term growth,” Patel says.

Op-Ed: How tech can help keep health care workers safe

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Ask any healthcare worker, and they will have their own story of workplace violence. In the early years of my career, I narrowly missed encountering a gunman in the hospital ER solely because I forgot something and had to return upstairs. While tragedy was avoided in my case, too often, it is not. Such incidents are not isolated; in fact, they are becoming disturbingly common.

According to a report from National Nurses United, 81.6 percent of nurses said they experienced workplace violence in 2023.

As a physician, providing excellent patient care has always been my priority; however, any type of workplace violence disrupts quality care. When the supposedly safe spaces of healing and learning become targets, we must look at ways beyond hardening the exteriors to help prevent such violence within buildings.

For our healthcare systems, the answer may lie within our schools.

Since we lost our daughter and 16 of her classmates and staff at Marjory Stoneman Douglas High School in Parkland, Florida, six years ago, my wife and I have been advocating for enhanced school safety measures for classrooms across the nation.

Seven states have passed Alyssa's Law, named for our daughter, which requires the installation of wearable panic alarm technology in education settings. These alarms, which instantly link every classroom to emergency personnel while also providing mass communication to all staff, serve as a lifeline in times of crisis. These wearable panic alarms are not just outfitted for classrooms: they can be utilized in any workplace setting, including a healthcare system.

Despite their difference in purpose, healthcare facilities and schools share the unique properties of community spaces. Healthcare facilities are safe havens for those who need healing and rest within our community. No one should fear for their safety going to the doctor. Just as lawmakers have rethought and revised school safety requirements, they should do the same for healthcare facilities. Wearable safety technology has emerged as a formidable solution to this pressing issue.

Wearable, mobile duress badge technology is tailor-made for the unique challenges faced by healthcare workers. It is discrete, easy to use, and can be customizable for each healthcare campus. Some duress badge providers have technology that equips nurses, doctors and staff with badges that display their location and the ability to signal the level of emergency with a push of a button. They can use one badge for all campuses within a healthcare system, and they do not have to wait to get in touch with a hospital operator to “sound the alarm” or risk escalating a situation by lunging for a wall-mounted panic button.

Mobile panic alarms offer a nuanced and efficient response mechanism. Whether a minor incident or a life-threatening crisis, healthcare professionals can instantly summon help, ensuring a swifter and more coordinated response.

Texas was one of the first states to take on this alarming trend of workplace violence by passing SB240 last session, mandating facilities to establish a workplace violence prevention plan. Similar legislation is playing out in other states, becoming a nationwide movement.

I know healthcare facilities' budgets are tight these days with unprecedented rising costs of care and lower reimbursement rates. Still, through my personal journey in advocating for safety improvements in our educational institutions, I have learned one thing: you must invest in the future.

The adoption of wearable panic alarms is not just a security upgrade; it's a commitment to the well-being of those who dedicate their lives to provide healing and care. It's about protecting our community spaces. Like any other, the healthcare environment should be a sanctuary, free from the fear of violence. As Alyssa’s Law gains traction nationally, the spotlight now turns to healthcare facilities to embrace this critical technology.

Time, as we know too well, equals life. Swift action can be the difference between tragedy and survival. Investing in wearable panic alarm technology is an investment in our healthcare workforce's safety, resilience, and mental well-being. As we advocate for students to have a safe place to thrive, I am doing the same for healthcare places. The time has come to make our healthcare facilities safe.

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Dr. Ilan Alhadeff is the father of Alyssa Alhadeff, a victim of the February 14, 2018, school shooting at Marjory Stoneman Douglas High School, and co-founder of Make Our Schools Safe, a 501(c)(3) nonprofit organization dedicated to improving school safety.

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