Credit markets and financial information

Lok, Stephen; Richardson, Scott

doi:10.1007/s11142-011-9147-6

Cited by 53 publications

(34 citation statements)

References 19 publications

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“…This raises the possibility that an observed empirical relation between equity-market activity and credit returns reflects the same drivers of equity returns (Lok and Richardson 2011). Several studies reflect this possibility (Callen et al 2009;Easton et al 2009;DeFond and Zhang 2011;Shivakumar et al 2011;Erturk and Nejadmalayeri 2012).…”

Section: Hypothesis Developmentmentioning

confidence: 99%

Price discovery in the CDS market: the informational role of equity short interest

2016

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This paper documents a negative relation between equity short interest and future returns on credit default swaps (CDS). This relation is most consistent with the theory that equity short interest telegraphs relevant information to secondary market CDS investors about credit spread not transmitted into prices in other ways. The CDS return predictive pattern also strengthens negatively for equity short-interest positions subject to an outward shift in the demand for shortable stocks, which we view as a proxy for the expected benefits of private information (Cohen et al. in J Finance 62(5): 2007). This suggests that features of the shorting market may help explain the lagged response of CDS spreads to equity short interest. Our tests of economic significance, however, do not support the view that the CDS return predictive pattern is strong enough to cover the round-trip cost of trading in the secondary CDS market.Keywords Equity short interest Á Credit default swaps Á Credit spreads Á Lagged asset price discovery JEL Classification G12 Á G14 Á G24 Á M41

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Section: Hypothesis Developmentmentioning

confidence: 99%

Price discovery in the CDS market: the informational role of equity short interest

2016

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“…Third, following the call from Lok and Richardson () who highlight the need for more empirical studies on the role of accounting information in guiding portfolio asset allocation, I show how accounting conservatism affects firm‐specific stock‐bond return co‐movement which in turn has important implications for portfolio allocation decisions. While the importance of aggregate stock‐bond return co‐movement for asset allocation is immediately clear, the relevance of firm‐specific co‐movement is not straightforward .…”

Section: Introductionmentioning

confidence: 85%

“…Third, following the call from Lok and Richardson (2011) who highlight the need for more empirical studies on the role of accounting information in guiding portfolio asset allocation, I show how accounting conservatism affects firmspecific stock-bond return co-movement which in turn has important implications for portfolio allocation decisions.…”

Section: Introductionmentioning

confidence: 93%

“…Option pricing theory (Black & Scholes, 1973;Merton, 1974) which characterizes the value of equity (debt) as a call (put) option on the firm's assets, shows that, as the volatility of assets increases (i.e., higher default risk), bondholders' claims become more equity-like and hence stock-bond correlation becomes stronger (Bao & Hou, 2014;Lok & Richardson, 2011;Schaefer & Strebulaev 2008). Conversely, a lower default risk reduces bondholders' sensitivity to improvements in earnings expectations and makes stock and bond returns less synchronous.…”

Section: H1mentioning

confidence: 99%

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Stock‐bond return co‐movement and accounting information

Cascino

2017

Business Fin & Account

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I examine how an important attribute of financial reporting quality, i.e., accounting conservatism, affects the sensitivity of corporate bond returns to changes in the value of equity (i.e., the hedge ratio). The correlation between stock and bond returns (co‐movement) is a fundamental input for asset allocation decisions as it determines the diversification benefits of bonds relative to equities within an investment portfolio. According to structural models of credit risk, co‐movement should be generally positive, but lower when the risk of wealth transfers from bondholders to shareholders is severe. I find that firms that report conservative earnings and use covenants in their bond contracts exhibit on average stronger co‐movement. This result is consistent with conservatism providing bondholders with a credible and contractible signal that improves monitoring, thus preventing wealth transfers.

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“…Therefore, it is expected that rated firms would gain the assistance of credit rating agencies to grab attention from investors. Credit ratings also provide perks of giving financial flexibility, decreasing the chances of incorrect and asymmetric information in the market (Lok and Richardson 2011).…”

Section: Introductionmentioning

confidence: 99%

Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

Sajjad

Zakaria

2018

JRFM

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The purpose of this study is to examine the relationship between credit rating scales and debt maturity choices. A liquidity hypothesis is used to formulate the testable proposition and conceptual framework. Generalized linear model (GLM) and pooled ordinary least square (OLS) are utilized by SAS programming to test the proposed hypothesis. Other different estimation techniques are also used for robust evidence. Results suggest that companies with high and low ratings have a shorter debt maturity. Companies with medium ratings have longer debt maturity structure. Liquidity shows a negative association with longer debt maturity structure. It is evident that at high rating scale with high liquidity, and at lower rating scales with lower liquidity firms have a shorter debt maturity. Mid rated firms with a low probability of refinancing risk show longer debt maturity structure. Considering refinancing risk by Asian companies make the nonlinear relationship between credit ratings and debt maturity choices. Results suggest the importance of credit ratings for the optimization of debt maturity structure of Asian firms, which was totally overlooked by the past studies. The findings of this study are consistent with the liquidity hypothesis. The findings also motivating financial managers and investors to consider credit ratings as a measure of financial constraints.

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Credit markets and financial information

Cited by 53 publications

References 19 publications

Price discovery in the CDS market: the informational role of equity short interest

Price discovery in the CDS market: the informational role of equity short interest

Stock‐bond return co‐movement and accounting information

Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

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