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Active CDS Trading and Managerss Voluntary Disclosure

SSRN Electronic Journal
2017
  • 38
    Citations
  • 9,589
    Usage
  • 38
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    38
    • Citation Indexes
      38
  • Usage
    9,589
    • Abstract Views
      8,616
    • Downloads
      973
  • Captures
    38
  • Ratings
    • Download Rank
      47,842

Article Description

We investigate how the availability of traded credit default swaps (CDSs) affects the referenced firms’ voluntary disclosure choices. CDSs enable lenders to hedge their credit risk exposure, weakening their incentives to monitor borrowers. We predict that reduced lender monitoring in turn leads shareholders to intensify their monitoring and demand increased voluntary disclosure from managers. Consistent with this expectation, we find that managers are more likely to issue earnings forecasts and forecast more frequently when traded CDSs reference their firms. We further find a stronger impact of CDS availability on firm disclosure when (i) lenders have higher ability and propensity to hedge credit risk using CDSs, and (ii) lender monitoring incentives and monitoring strength are weaker. Consistent with an increase in shareholder demand for public information disclosure induced by a reduction in lender monitoring, we find a stronger effect of CDSs on voluntary disclosure for firms with higher institutional ownership and stronger corporate governance. Overall, our findings suggest that firms with traded CDS contracts enhance their voluntary disclosure to offset the effect of reduced monitoring by CDS-protected lenders.

Bibliographic Details

Jae B. Kim; Pervin K. Shroff; Dushyantkumar Vyas; Regina Wittenberg Moerman

Elsevier BV

the CDS market; actively traded CDS contracts; voluntary disclosures; earnings forecasts; firm-initiated press releases

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