The Sensitivity of the CDS Market to Financial Analysts’ Forecast Revisions

• In Event: Financial Accounting and Reporting 2

Abstract

Financial analysts have been shown to impact both equity and bond markets (e.g., Francis and Soffer, 1997; Gleason and Lee, 2003; Khurana and Raman, 2003). However, to our knowledge no study has examined their potential impact on the market for credit default swaps (CDSs). Existing research has also generally shown that cash flow forecasts are, at best, no more informative than earnings per share forecasts (Givoly et al., 2009; Call et al., 2013). We examine the impact of both analysts’ earnings per share (EPS) and cash flow per share (CPS) forecast revisions on CDS spreads. We find that while both EPS and CPS revisions impact the CDS market, cash flow forecast revisions typically have a larger effect. We find that this relationship tends to be stronger in cases of financial distress. Our study provides evidence that cash flow forecasts dominate earnings forecasts in some situations.

Authors

• Pervaiz Alam, Kent State University - Kent

• Xiaoling Pu, Kent State University

• Barry R Hettler, Kent State University - Kent