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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27576
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| Title: | The Impact of Earnings on the Pricing of Credit Default Swaps |
| Authors: | Callen, Jeffrey L.
Livnat, Joshua
Segal, Dan |
| Issue Date: | 7-Dec-2006 |
| Series/Report no.: | Joshua Livnat-05 |
| Abstract: | This study evaluates the impact of earnings on firm credit risk as
captured by Credit Default Swaps (CDS). We find that earnings (changes)
are negatively correlated with one-year swap premia (changes) after
controlling for equity returns but not with longer term premia
(changes). We also find that earnings surprises are significantly
correlated with one-year CDS premia changes in the short window
surrounding preliminary earnings dates and that absolute earnings
surprises are significantly correlated with absolute one-year CDS premia
changes in the short window surrounding SEC filing dates. These results
suggest that high earnings convey favorable information about the
short-term default risk of firms but not about the long term default
risk. We further document that accruals/cash flow information conveyed
by SEC filings provides information about long-term credit risk.
Furthermore, the empirical results are consistent with structural and
hybrid model-driven implications of CDS pricing. |
| URI: | http://hdl.handle.net/2451/27576 |
| Appears in Collections: | Accounting Working Papers
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