Earnings Restatements and Credit Default Swaps

• In Event: Managerial and Financial Accounting

Abstract

This paper investigates the reaction of the credit default swap market to earnings restatements. We evaluate the credit default swap anticipation of earnings restatements in 3-day event window, 20-day preannouncement window, as well as the long term post-announcement window. We do not find significant evidence that the credit default swaps market anticipates earnings restatements. The announcement event window increase in credit default swap spread is marginal; however, we register significant decrease in credit default swap spread that starts in the long post-announcement window and is reinforced for up to six weeks after the official announcement, especially for corporate firms, firms with poor credit quality, as well as firms whose restatements are associated with fraud. Our evidence suggests that the credit default swaps market reacts to earnings restatement with delay and reaction is generally associated with poor credit quality firms and firms reporting financial reporting fraud.

Authors

• Pervaiz Alam, Kent State University

• Xiaoling Pu, Kent State University

• Tzveta Vateva, Kent State University