Alam_et_al-2018-Accounting_%26_Finance.pdf (284.6 kB)
Download file

The pricing of accruals quality in credit default swap spreads

Download (284.6 kB)
journal contribution
posted on 12.05.2022, 04:12 by P Alam, X Pu, B Hettler, Hai LinHai Lin
We examine the association between accounting information risk, measured with accruals quality (AQ), and credit spreads, primarily measured with credit default swap (CDS) spreads. Theoretically, AQ measures the precision with which accruals map into cash flows. Better AQ implies a more precise estimate of future cash flows and, we predict, a reduction in credit spreads due to resulting lower uncertainty regarding the ability to meet debt interest and principal payments. In support of this hypothesis, we find a negative relationship between AQ and CDS spreads whereby better AQ is associated with lower CDS spreads. Additionally, we investigate the components of total AQ and find that innate AQ is more strongly associated with CDS spreads than is discretionary AQ. We further show that AQ moderates the market's pricing of earnings: the relationship between earnings and CDS spreads weakens as AQ worsens. Together, our results indicate that accounting information risk is priced in credit spreads and that the CDS market responds not only to the level of earnings, but the quality thereof as well.

History

Preferred citation

Alam, P., Pu, X., Hettler, B. & Lin, H. (2020). The pricing of accruals quality in credit default swap spreads. Accounting and Finance, 60(3), 1943-1977. https://doi.org/10.1111/acfi.12368

Journal title

Accounting and Finance

Volume

60

Issue

3

Publication date

01/09/2020

Pagination

1943-1977

Publisher

Wiley

Publication status

Published

Online publication date

03/05/2018

ISSN

0810-5391

eISSN

1467-629X

Language

en