Credit Derivatives and Earnings Announcements

• In Event: Fair Value Accounting

Abstract

We examine price discovery in the single-name credit default swap (CDS) market, focusing on the role of private information before quarterly earnings announcements. We find that the speed of CDS price discovery and the strength of incremental CDS price discovery relative to stocks are positively related to analyst forecast dispersion, idiosyncratic volatility, and the presence of earnings-based covenants in the obligor’s syndicated loans. Similar characteristics also help explain the level and variation of CDS liquidity before earnings announcements. These findings suggest that private information facilitates CDS price discovery and liquidity provision, highlighting an important trade-off for the recent regulatory reform, which imposes greater transparency in the over-the-counter derivatives market.

Authors

• George Batta, Claremont McKenna College

• Jiaping Qiu, McMaster University

• Fan Yu, Claremont McKenna College