The Effect of Credit Default Swaps on Analyst Forecasting

• In Event: Accounting and Forecasting

Abstract

This research studies the effect of the presence of a credit default swap (CDS) on financial analysts’ forecast characteristics. Specifically, we examine whether and how the revelation of private information in the CDS market, which often leads public information disclosure and price discovery in equity markets, affects forecast accuracy and dispersion. The results show that analysts have more accurate and less dispersed cash flow forecasts for firms with a traded CDS. These findings are consistent with the predictions that financial analysts include the information revealed from the CDS market in their cash flow forecasts. We also find that CDS prices and CDS price changes are negatively (positively) associated with analysts’ cash flow forecast accuracy (dispersion) suggesting CDS prices and price changes lead to disagreements among financial analysts.

Authors

• Emrah Ekici, University of Wisconsin-Eau Claire

• Steven Crawford, University of Houston