The market for credit default swaps: new insights into investors' use of accounting information?

Griffin, Paul A.

doi:10.1111/acfi.12092

Cited by 30 publications

(20 citation statements)

References 80 publications

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“…This paper complements the extant research on RFDs that focuses exclusively on equity markets. Our study also responds directly to the call for further research on the effect of corporate disclosures in a CDS setting (Griffin 2014). More importantly, our results provide evidence on the impact of qualitative disclosures on CDS spreads relative to quantitative disclosures (e.g., performance metrics and management earnings forecasts) that have been documented in the prior research (e.g., Callen et al 2009;Shivakumar et al 2011).…”

Section: Resultssupporting

confidence: 72%

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

Chiu

Guan

Kim

2018

Contemporary Accting Res

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This study examines the relation between narrative risk disclosures in mandatory reports and the pricing of credit risk. In particular, we investigate whether and how the Securities and Exchange Commission (SEC) mandate of risk factor disclosures (RFDs) affects credit default swap (CDS) spreads. Based on the theory of Duffie and Lando (2001), we predict and find that CDS spreads decrease significantly after RFDs are made available in 10‐K/10‐Q filings. These results suggest that RFDs improve information transparency about the firm's underlying risk, thereby reducing the information risk premium in CDS spreads. The content analysis further reveals that disclosures pertinent to financial and idiosyncratic risk are especially relevant to credit investors. In cross‐sectional analyses, we document that RFDs are more useful for evaluating the business prospects and default risk of firms with greater information uncertainty/asymmetry. Overall, our findings imply that the SEC requirement for adding a risk factor section to periodic reports enhances the transparency of firm risk and facilitates credit investors in evaluating the credit quality of the firm.

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Section: Resultssupporting

confidence: 72%

“… Griffin (, 848) indicates that “the credit derivative market provides a new setting to examine how accounting information might affect investors' risk assessments….”…”

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confidence: 99%

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

Chiu

Guan

Kim

2018

Contemporary Accting Res

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“…() investigate the impact of profitability on the use of CDSs and find that net buyers of protection have a higher ROE , which means that they are more highly levered and hence more vulnerable to shocks. Das and Hanouna () show that firms with higher performance as measured by ROE and ROA have CDS securities with lower spreads (see also Griffin, ). Thus, the probability of default is lower when the firm's profitability improves.…”

Section: Econometric Model and Datamentioning

confidence: 99%

“…Since the inception of credit default swap (CDS) trading in the early 2000s, the CDS market has grown phenomenally (Griffin, ), although the onset of the global financial crisis (GFC) in 2007 led to a significant decline in the market. Many claim that CDSs provide incentives for risk‐taking in banks (e.g.…”

Section: Introductionmentioning

confidence: 99%

The role of managerial risk‐taking in the ‘rise and fall’ of the CDS market

Dias

2015

Accounting & Finance

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Since the innovation of credit default swaps (CDSs) in 1997, the market for CDSs grew dramatically to $62 trillion in 2007 (ISDA 2010). However, this market declined significantly with the onset of the GFC, prompting the question, 'What lies behind the phenomenal growth and the eventual collapse of the CDS market?' Using CDS spread data from 319 bank and non-bank financial institutions across 33 countries over the period 2001-2010, I provide evidence of the determinants that affect risk-taking by financial institutions, proxied by CDS spreads, and argue within an agency theoretical framework that managerial risk-taking contributed to the 'rise and fall' of the CDS market.

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“…Of the handful of such studies, most are based either on credit ratings or on corporate bond yield spreads (see the discussion below). There are many reasons why the CDS market dominates the corporate bond market and credit ratings for analyzing credit risk (see Callen et al 2009 andGriffin 2014). For example, unlike CDS contracts, bond spreads include factors unrelated to credit risk, such as interest rate risk and other systematic risk factors (Elton et al 2001).…”

Section: Ifrs Transparency and Credit Riskmentioning

confidence: 99%

Testing the Transparency Implications of Mandatory IFRS Adoption: The Spread/Maturity Relation of Credit Default Swaps

2016

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T his study tests whether international financial reporting standards (IFRS) adoption increased accounting transparency based on model-driven hypotheses. Duffie and Lando [Duffie D, Lando D (2001) Term structures of credit spreads with incomplete accounting information. Econometrica 69 (3): [633][634][635][636][637][638][639][640][641][642][643][644] show that changes to accounting transparency affect the spread/maturity relation of credit default swap (CDS) instruments in very specific ways. Consistent with their model, we find that CDS spreads are lower across maturities following the adoption of IFRS, and the slope and concavity of the CDS spread/maturity relation are higher. These changes did not occur to the spread/maturity relation of a control sample of CDS instruments. Predicted changes apply more intensely to firms with low pre-IFRS transparency. Overall, this study provides strong evidence that IFRS adoption increased accounting transparency.

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The market for credit default swaps: new insights into investors' use of accounting information?

Cited by 30 publications

References 80 publications

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

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

The role of managerial risk‐taking in the ‘rise and fall’ of the CDS market

Testing the Transparency Implications of Mandatory IFRS Adoption: The Spread/Maturity Relation of Credit Default Swaps

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