The Pricing of Accruals Quality in Credit Default Swap Premia

• In Event: Financial Accounting and Reporting III

Abstract

Recent research has demonstrated that earnings, and its constituent components of cash flows and accruals, are negatively related to credit default swap (CDS) premia (e.g., Callen et al., 2009). We further this stream of research by examining the effect of the quality of accruals on CDS premia. Controlling for earnings, we hypothesize a decrease in accrual quality will increase CDS premia due to increased information risk. Our findings support this conjecture. Additionally, we find innate, rather than discretionary, accruals are more strongly associated with CDS premia.

Authors

• Pervaiz Alam, Kent State University

• Xiaoling Pu, Kent State University

• Barry Hettler, Kent State University