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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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