Externalities of credit default swaps on corporate disclosure

Matthew CEDERGREN, Ting LUO, Yue ZHANG

Research output: Other Conference ContributionsConference Paper (other)Other Conference Paperpeer-review

Abstract

We investigate the effects of credit default swap (CDS) trading on customers on management forecasts by the supplier firms. We find that firms which derive a greater proportion of their revenue from CDS-referenced customers tend to lower forecast issuance, suggesting that enhanced information revelation in customers’ CDS market decreases suppliers’ disclosure benefits, creating a disincentive for managers to issue forecasts. We further find that this effect manifests for good news forecasts, but not for bad news forecasts, because of the litigation risk associated with withholding bad news. Our results are robust to a variety of sensitivity tests that control for potential self-selection in CDS-referenced customers, and our results strengthen when we focus on supplier firms which themselves are not referenced by CDSs. Our findings add to the literature examining the externality effects of CDSs on corporate decisions of entities outside of those directly referenced by CDSs.
Original languageEnglish
Publication statusPublished - 31 May 2018
Event41st Annual Congress of the European Accounting Association - Bocconi University, Milano, Italy
Duration: 30 May 20181 Jun 2018
http://eaa2018.eaacongress.org/r/home

Conference

Conference41st Annual Congress of the European Accounting Association
Abbreviated titleEAA 2018
CountryItaly
CityMilano
Period30/05/181/06/18
Internet address

Fingerprint

Corporate disclosure
Externalities
Credit default swaps
Suppliers
News
Revenue
Management forecasts
Self-selection
Managers
Litigation risk
Proportion
Information revelation
Disclosure

Cite this

CEDERGREN, M., LUO, T., & ZHANG, Y. (2018). Externalities of credit default swaps on corporate disclosure. Paper presented at 41st Annual Congress of the European Accounting Association, Milano, Italy.
CEDERGREN, Matthew ; LUO, Ting ; ZHANG, Yue. / Externalities of credit default swaps on corporate disclosure. Paper presented at 41st Annual Congress of the European Accounting Association, Milano, Italy.
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CEDERGREN, M, LUO, T & ZHANG, Y 2018, 'Externalities of credit default swaps on corporate disclosure' Paper presented at 41st Annual Congress of the European Accounting Association, Milano, Italy, 30/05/18 - 1/06/18, .

Externalities of credit default swaps on corporate disclosure. / CEDERGREN, Matthew; LUO, Ting; ZHANG, Yue.

2018. Paper presented at 41st Annual Congress of the European Accounting Association, Milano, Italy.

Research output: Other Conference ContributionsConference Paper (other)Other Conference Paperpeer-review

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AU - CEDERGREN, Matthew

AU - LUO, Ting

AU - ZHANG, Yue

PY - 2018/5/31

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N2 - We investigate the effects of credit default swap (CDS) trading on customers on management forecasts by the supplier firms. We find that firms which derive a greater proportion of their revenue from CDS-referenced customers tend to lower forecast issuance, suggesting that enhanced information revelation in customers’ CDS market decreases suppliers’ disclosure benefits, creating a disincentive for managers to issue forecasts. We further find that this effect manifests for good news forecasts, but not for bad news forecasts, because of the litigation risk associated with withholding bad news. Our results are robust to a variety of sensitivity tests that control for potential self-selection in CDS-referenced customers, and our results strengthen when we focus on supplier firms which themselves are not referenced by CDSs. Our findings add to the literature examining the externality effects of CDSs on corporate decisions of entities outside of those directly referenced by CDSs.

AB - We investigate the effects of credit default swap (CDS) trading on customers on management forecasts by the supplier firms. We find that firms which derive a greater proportion of their revenue from CDS-referenced customers tend to lower forecast issuance, suggesting that enhanced information revelation in customers’ CDS market decreases suppliers’ disclosure benefits, creating a disincentive for managers to issue forecasts. We further find that this effect manifests for good news forecasts, but not for bad news forecasts, because of the litigation risk associated with withholding bad news. Our results are robust to a variety of sensitivity tests that control for potential self-selection in CDS-referenced customers, and our results strengthen when we focus on supplier firms which themselves are not referenced by CDSs. Our findings add to the literature examining the externality effects of CDSs on corporate decisions of entities outside of those directly referenced by CDSs.

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CEDERGREN M, LUO T, ZHANG Y. Externalities of credit default swaps on corporate disclosure. 2018. Paper presented at 41st Annual Congress of the European Accounting Association, Milano, Italy.