The sensitivity of the credit default swap market to financial analysts’ forecast revisions

Alam, Pervaiz; Pu, Xiaoling; Hettler, Barry

doi:10.1111/acfi.12235

Cited by 3 publications

(5 citation statements)

References 50 publications

(86 reference statements)

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“…To estimate how the relevance of default risk to expected future earnings changes with contract maturity, we interact ΔQ t with indicator variables for the 5-year CDS maturity (MAT05) and the 10-year CDS maturity (MAT10). Alam et al (2018) document a negative relation between changes in earnings expectations and changes in default risk. However, for a given maturity, this association remains an open empirical question.…”

Section: Cds Spread Regression Modelmentioning

confidence: 99%

“…Alam et al (2018) document a negative relation between changes in earnings expectations and changes in default risk. However, for a given maturity, this association remains an open empirical question.…”

Section: Empirical Designmentioning

confidence: 99%

“…As an alternative proxy for future earnings expectations, we use analyst forecasts. Alam et al (2018) find that analysts' revisions of earnings per share (EPS) forecasts are informative to the CDS market. For this reason, we replace Δ Q t with the change in the sum of 4 years of forecasted earnings (Δ E t ).…”

Section: Empirical Designmentioning

confidence: 99%

“…Our paper focuses on differences in the relationship between future earnings expectations and the market assessment of default risk over various debt contract maturities. Alam et al (2018) provide evidence that earnings expectations reduce default risk. We extend this research by introducing contract maturity as a moderating variable in this association.…”

Section: Introductionmentioning

confidence: 99%

“…Our study makes two contributions to the literature. First, we extend Alam et al (2018) results to evaluate how contract maturity affects the negative relation between changes in earnings expectations and changes in default risk. To date, research evaluating default risk assessments has not considered that the financial information utilised in these assessments may vary based on the horizon over which default is being assessed.…”

mentioning

confidence: 99%

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Default risk and earnings expectations: The role of contract maturity in the credit default swap market

Hill

Taylor

2023

Accounting & Finance

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Agency conflicts increase with contract maturity. As contract maturity increases, managers, acting on behalf of shareholders, have more opportunities to use their discretion in ways that adversely affect future payoffs. Agency theory suggests that when contract maturity increases, creditors place less weight on a firm's growth opportunities in assessing default risk. We present a counter‐argument: because the timing of future payoffs is uncertain, longer‐duration debt provides creditors with a longer horizon over which payoffs are earned. Using credit default swap (CDS) spreads, we demonstrate that the relevance of future earnings expectations increases with CDS maturity. Our results suggest that contract maturity is not a reliable proxy for agency costs when evaluating the credit market relevance of financial information.

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Section: Cds Spread Regression Modelmentioning

confidence: 99%

Section: Empirical Designmentioning

confidence: 99%

Section: Empirical Designmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 99%

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Default risk and earnings expectations: The role of contract maturity in the credit default swap market

Hill

Taylor

2023

Accounting & Finance

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The relevance of GAAP vs. non-GAAP net assets to creditors: An examination of the credit default swap market

Brasel

Hill

Taylor

2022

Advances in Accounting

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Accounting downside risk measures and credit spreads

Alam

Hettler

Gao

2021

RAF

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Purpose This study aims to examine the association between predictive accounting downside risk measures and changes in credit spreads. Building upon the earnings downside risk (EDR) measure developed in prior literature, this paper introduces cash flow downside risk (CFDR). Design/methodology/approach This study modifies an existing empirical framework (root lower partial moment) to calculate CFDR and applies it to a sample of firms between 2002 and 2013 for which credit default swap data are available. Findings After validating the measure, this study identifies a positive association between CFDR and changes in credit spreads. This paper further shows the association between CFDR and credit spread changes is stronger than that between EDR and credit spread changes. Financial stability moderates the relationship between CFDR and credit spreads. Originality/value This study proposes a novel measure of accounting downside risk, CFDR and demonstrates a negative association between this measure and future cash flow and a positive association between this measure and future credit spreads.

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The sensitivity of the credit default swap market to financial analysts’ forecast revisions

Abstract: Toledo. We are also thankful for comments and suggestions received from Z. Kaplan and T.

Cited by 3 publications

References 50 publications

Default risk and earnings expectations: The role of contract maturity in the credit default swap market

Default risk and earnings expectations: The role of contract maturity in the credit default swap market

The relevance of GAAP vs. non-GAAP net assets to creditors: An examination of the credit default swap market

Accounting downside risk measures and credit spreads

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