The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Chiu, Tzu‐Ting; Guan, Yuyan; Kim, Jeong‐Bon

doi:10.2139/ssrn.2598957

Cited by 5 publications

(12 citation statements)

References 9 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…We identify credit investors' perceived risk through CDS spread because it reflects credit investors' risk assessments more quickly and accurately than the spreads of other debt instruments, such as bank loans or corporate bonds (Callen et al, 2009;Griffin et al, 2016;Shivakumar et al, 2011). Specifically, we follow Shivakumar et al (2011) andChiu et al (2018) to use 5-year CDS contracts' spread averaged over the fiscal year. We choose the 5-year CDS contracts because "they are the most liquid contracts in the US markets and have the best coverage in the database" (Shivakumar et al, 2011, p. 471).…”

Section: Measurement Of Credit Investors' Perceived Riskmentioning

confidence: 99%

“…4,5 Given the difference in perceived risk between equity and credit investors, we also examine credit investors' perceived risk as reflected in credit default swap (CDS) spreads. Earnings volatility could be more important for credit investors than for equity investors due to the asymmetric loss function that creditors face (Chiu et al, 2018). Our analysis focuses on CDS spreads because this measure reflects credit investors' perceptions of risk in a more accurate and timely manner than the spreads of other debt instruments (Callen et al, 2009;Griffin et al, 2016;Shivakumar et al, 2011).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Does real earnings smoothing reduce investors’ perceived risk?

Kim

Wang

Zhang

2021

Business Fin & Account

View full text Add to dashboard Cite

This study examines whether real earnings smoothing influences equity and credit investors' perceptions of risk. Using a large sample of US public firms, we find that real earnings smoothing is negatively associated with option-implied volatility, suggesting that real earnings smoothing lowers equity investors' perceived risk. We also find that real earnings smoothing is negatively associated with credit default swap spread, implying that real earnings smoothing lowers credit investors' perceived risk. Our results are robust to multiple sensitivity analyses and to various tests used to address potential endogeneity. Moreover, the effect of real earnings smoothing is greater than that of accrual-based smoothing, suggesting that real earnings smoothing is more difficult for investors to detect and unravel. Overall, our study documents a new factor that influences both equity and credit investors' ex-ante perceptions of risk.

show abstract

Section: Measurement Of Credit Investors' Perceived Riskmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Does real earnings smoothing reduce investors’ perceived risk?

Kim

Wang

Zhang

2021

Business Fin & Account

View full text Add to dashboard Cite

show abstract

“…By mandating a separate risk factor section in corporate filings, the SEC aims to enhance investors’ understanding of firms’ fundamental risks and to assist investors in making more informed decisions. Although the mandated RFDs are deemed as boilerplate or redundant by critics (Malone ), recent papers (e.g., Campbell et al ; Hope et al ; Chiu et al ) document that the amount and specificity of risk disclosures in the annual report increase investors’ perception of firm risk, while decreasing information asymmetries in the equity and debt markets. These findings suggest that RFDs are useful to capital market participants.…”

Section: Relevant Literature and Hypothesis Developmentmentioning

confidence: 99%

“…First, critics of the SEC's risk disclosure requirement argue that RFDs are vague and likely to be boilerplate because they are simply qualitative descriptions of all potential risks and uncertainties faced by firms (Malone ). Recent studies (e.g., Campbell et al ; Hope et al ; Chiu et al ) document that RFDs are informative and useful in that they enhance investors’ assessment of firm risk and meanwhile reduce the information asymmetry in the capital market. Unlike previous studies that primarily focus on the information role of RFDs in the capital market, we address the usefulness of RFDs from the perspective of product market participants.…”

Section: Introductionmentioning

confidence: 99%

Customers’ Risk Factor Disclosures and Suppliers’ Investment Efficiency

Chiu

Kim

Wang

2019

Contemporary Accting Res

View full text Add to dashboard Cite

This study examines the effect of downstream firms’ (i.e., customers’) risk factor disclosures contained in annual reports on the investment efficiency of upstream firms (i.e., suppliers). We find that more informative disclosures of customers’ risk factors are associated with less under‐ or overinvestment by suppliers. In addition, this inverse association is stronger when the suppliers are at a bargaining disadvantage, when they operate in the durable goods industries, and when they are more concerned about the volatility of future demand. Overall, our results suggest that risk factor disclosures provided by firms in their annual reports contain useful information that could potentially help their suppliers achieve better investment efficiency. Divulgation d'information sur les facteurs de risque des clients et efficience de l'investissement des fournisseurs

show abstract

“…The business originated information, which is included in the business reports has another role as well, which is to treat uncertainty and tame adverse effects and excessive market reactions. Based on the theory of Duffie and Lando (2001), Chiu et al (2018) show that credit default swap spreads decrease significantly after risk factor disclosures are made available in 10-K/10-Q filings. At the same time, the management tone sometimes indicates that, in addition to reflecting current and future performance, the tone of conference calls is significantly influenced by a manager-specific tendency to be optimistic or pessimistic (Davis et al, 2015).…”

Section: Introductionmentioning

confidence: 99%

Corporate liquidity, supply chain and cost issues awareness within the Covid-19 context: evidence from us management reports’ textual analysis

Fassas

Bellos

Kladakis

2021

View full text Add to dashboard Cite

Purpose The purpose of this study is to assess the management responses and intentions of 3,279 US firms from all industries, before and after the coronavirus outbreak, to identify the level of managerial concern about specific financial issues and potential economic costs of the COVID-19 pandemic. Design/methodology/approach This paper uses textual analysis of official management reports to search for specific single words in five domains related to corporate finance and governance. This paper focuses on the relative frequency of single words using a weighting scheme that adjusts for document length and for the inverse document frequency. This paper then uses t-tests to investigate the univariate differences across groups of reports before and after the US stock market crash in February 2020. Findings The applied textual and empirical analysis provides evidence that firms’ primary concerns relate to the disruption in supply chains, liquidity need and coronavirus-led recession. This paper also shows that the main cost reduction measure they are considering is salary reduction, rather than workforce reduction. This paper also shows evidence that firm managers are rather swift to provide coronavirus-related information in the US Securities and Exchange Commission (SEC) corporate filings. Practical implications The findings provide a primary view of the directions, on which US firms will move in the near future, and thus, they can be used as tools for the formulation of appropriate government policies in the corresponding sectors, which could mitigate the economic risks related to the pandemic. At the business level, the disseminated knowledge can assist firms either in the same sector or in similar/related sectors to “locate” themselves within the map of the pandemic and to adjust or align correspondingly their strategies and decisions as they will have a view of the bigger picture. Originality/value The empirical analysis divulges US firms’ management primary concerns after the COVID-19 outbreak, and thus, offers insights to the processes taking place in the US business community and the formulating new corporate and economic reality.

show abstract

The Effect of Risk Factor Disclosures on the Pricing of Credit Default Swaps

Cited by 5 publications

References 9 publications

Does real earnings smoothing reduce investors’ perceived risk?

Does real earnings smoothing reduce investors’ perceived risk?

Customers’ Risk Factor Disclosures and Suppliers’ Investment Efficiency

Corporate liquidity, supply chain and cost issues awareness within the Covid-19 context: evidence from us management reports’ textual analysis

Contact Info

Product

Resources

About