The externalities of credit default swaps on stock return synchronicity

Abstract

We examine the externality effect of customer firms’ credit default swap (CDS) trading on the stock price informativeness of supplier firms. Our empirical results show that firms with a high proportion of sales to CDS referenced customers tend to have more firm‐specific embedded information in their stock prices and thus higher stock price informativeness, which is associated with a lower level of stock return synchronicity. We provide new evidence of CDS trading externality on equity market information environments along the supply chain.

Messages in online stock forums and stock price synchronicity: Evidence from China

“…Panel A of Table 2 presents the summary statistics of the key variables used in the analysis. The mean values of the two measures of stock price synchronicity ( synch1 and synch2 ) are −0.230 and −0.387, respectively, comparable to those reported in prior studies (Gul et al, 2010; Meng et al, 2020; Zhao & Zhu, 2020). The mean value of the number of Guba postings ( post ) and Guba reads ( read ) is 8.681 and 15.661, respectively.…”

“…The natural logarithm of one plus the number of media reports covering the firm by eight main financial media outlets in China in a given year and −0.387, respectively, comparable to those reported in prior studies (Gul et al, 2010;Meng et al, 2020;Zhao & Zhu, 2020). The mean value of the number of Guba postings (post) and Guba reads (read) is 8.681 and 15.661, respectively.…”

“…To measure stock price synchronicity, we follow prior studies (e.g., Chan & Chan, 2014; Gul et al, 2010; Meng et al, 2020; Zhao & Zhu, 2020) and construct two variables: synch1 and synch2 . In particular, for each listed firm, we obtain the goodness of fit R 2 in year t by estimating Equations (1) and (2), respectively:$$$$ {Ret}_{i,w,t}={\alpha}_0+{\alpha_1}^{\ast }{R}_{M,w,t}+{\alpha_2}^{\ast }{R}_{M,w‐1,t}+{\alpha_3}^{\ast }{R}_{I,w,t}+{\alpha_4}^{\ast }{R}_{I,w‐1,t}+{\varepsilon}_{i,w,t}, $$$$ $$$$ {Ret}_{i,w,t}={\beta}_0+{\beta_1}^{\ast }{R}_{M,w,t}+{\beta_2}^{\ast }{R}_{I,w,t}+{\varepsilon}_{i,w,t}, $$$$where Ret i , w , t denotes weekly return of stock i in week w of year t adjusted for the cash dividend reinvestment.…”

“…Xu et al (2013) show that by providing additional firm-level information to investors, star analysts can help reduce stock price synchronicity. Boubaker et al (2014) focus on the conflict between controlling and minority shareholders and show that the separation of 3 Extending the work of Bai et al (2017), Zhao and Zhu (2020) investigate the externalities of CDS trading and demonstrate that the CDS transactions of customer firms will have spillover effects on the disclosure of the supplier firms' information. Specifically, the customer information conveyed from the CDS market enriches the suppliers' information environment and thus leads to a reduction in the suppliers' stock price synchronicity.…”

Cross‐market information transmission along the supply chain network

“…In a recent paper, Zhao and Zhu (2020) find that suppliers with higher sales to CDS referenced customers exhibit lower stock return synchronicity, suggesting that customer CDS trading has a significant spillover effect on supplier stock price informativeness. The authors argue that such spillover effect can be induced by either the price discovery channel (i.e., more private information revelation in customer CDS market) or the information-production channel (i.e., more public information in customers' voluntary disclosures), without examining these channels directly.…”