The Impact of News Articles and Corporate Disclosure on Credit Risk Valuation

Tsai, Feng-Tse; Lu, Hsin-Min; Hung, Mao‐Wei

doi:10.2139/ssrn.2486292

Cited by 12 publications

(7 citation statements)

References 46 publications

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“…Proprietary costs can be minimized if information revealed do not result in opponents taking unfavorable actions [17,18]. Several other research shows that in the absence of proprietary costs, manager will follow a full disclosure policy [19,24,25]. Therefore, we expect that lower disclosure complexity brings rise to proprietary costs.…”

Section: Hypotheses Developmentmentioning

confidence: 91%

“…Creditors may modify loan terms such as decrease the amount of loans, increase the interest rates, and shorten loan maturity in response to poor performance [26]. For instance, Tsai et al [19] find that an increase in corporate risk disclosure results in higher credit risks. If there is a higher level of perceived credit risk, creditors will eventually demand for higher interest rates since they have to bear greater risk that firms may fail to settle loans in the future.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

“…In reducing the complexity of annual reports, firms that previously use complex disclosures to obscure bad performance will no longer be able to do so. Creditors may modify loan terms such as decrease the amount of loans, increase the interest rates, and shorten loan maturity in response to poor performance since an increase in corporate risk disclosure may result in higher credit risks [19].…”

Section: Introductionmentioning

confidence: 99%

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The Costs and Benefits of Reducing Complex Disclosures

Halim¹,

Soenarno²

2018

JFA

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Purpose: Reducing annual report disclosure complexity has been a topic of serious debate for standard setters in recent years. In response to that, this study seeks to explore the effect of reducing such complexity on ERC, agency costs, proprietary costs, as well as interest rates on loans given by banks. Methodology: Based on listed companies in Indonesia for the year 2016, required data is collected through the IDX website. All empirical results in this study are obtained through the IBM SPSS Statistics software version 23 using the linear regression function for each hypothesis. Findings: The overall empirical results show that: 1) ERC and proprietary cost is not significantly affected by fog index, suggesting a less effective capital market in Indonesia, where information is not immediately processed in the market; 2) Agency costs are inversely related to disclosure complexity, suggesting that firms producing simpler reports are either mostly involved in tax planning, or larger Indonesian firms with lower fog usually bear higher monitoring costs; and 3) Interest rates on loans given by banks are greatly affected by disclosure complexity. Firms with more complex reports tend to get lower rates on bank loans as compared to those with much more readable reports, suggesting that providing debtholders with more complex information actually reassure them to offer lower rates. Originality: This paper is the first to explore the costs and benefits of reducing disclosure complexity in Indonesia.

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Section: Hypotheses Developmentmentioning

confidence: 91%

Section: Hypotheses Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

The Costs and Benefits of Reducing Complex Disclosures

Halim¹,

Soenarno²

2018

JFA

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“…For value‐at‐risk (VaR) disclosures in 10‐K and 10‐Q files of US commercial banks, Jorion () further finds that a higher VaR‐based volatility forecast implies greater variability in subsequent unexpected trading revenues. Concerning credit risk valuation, Tsai, Lu, and Hung () observe a significantly positive impact of risk disclosures in 10‐K and 10‐Q files on spreads in the credit‐default‐swap (CDS) market, whereby the subcategory financial risk exhibits the highest impact, and Bonsall IV and Miller () show that, among other aspects, risk‐related terms are positively related to credit spreads.…”

Section: Literature Reviewmentioning

confidence: 99%

An Empirical Analysis of Market Reactions to the First Solvency and Financial Condition Reports in the European Insurance Industry

Gatzert¹,

Heidinger²

2019

J of Risk & Insurance

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In 2017, insurers in the European Union disclosed their Solvency and Financial Condition Reports (SFCRs) according to the third pillar of Solvency II for the first time. The aim of this article is to empirically analyze market reactions to the first SFCRs for all publicly listed insurers in the European Union that published an English report based on an event study. We thereby investigate which key figures and textual attributes matter most to investors, using regression analyses and text mining approaches. We also discuss potential areas for improvement concerning SFCR disclosure, such as a central public disclosure platform and further standardization of disclosure requirements, which could further enhance the goals of transparency and market discipline in relation to Solvency II's Pillar 3. Our results show that SFCR key figures matter more than textual features. Specifically, we find a significantly positive market impact of the solvency ratio calculated without transitionals or adjustments and a significantly negative one for the solvency capital requirement (SCR).

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“…Specifically, we control for macroeconomic conditions by including interest rate swap ( Swap rate ), term slope ( Term slope ) and CDS index ( Log (CDX) ) (e.g., Tang et al., ) . We additionally control for various aspects of firm characteristics that have been shown to proxy for the company's overall financial viability such as firm size ( Log (Total Assets) ), stock volatility ( Equity volatility ), return on assets ( Return on assets ), leverage ( Leverage ratio ), loss indicator ( Loss indicator ), receivables and inventory efficiency ( Receivables and inventory ratio ), and operating cash flow ( Operating cash flow ratio ) (e.g., Callen et al., ; Tsai, Lu, & Hung, ). We also include the S&P long‐term credit rating ( Credit rating ) to control for the overall financial distress risk of the underlying firm.…”

Section: Sample Description and Variable Selectionmentioning

confidence: 99%

Tournament incentives and firm credit risk: Evidence from credit default swap referenced firms

Huang

Jain

2019

Business Fin & Account

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In this paper, we evaluate the impact of managerial tournament incentives on firm credit risk in credit default swap (CDS) referenced firms. We find that intra-firm tournament incentives are negatively related to credit risk. Our results suggest that tournament incentives reduce credit risk by alleviating the potential for underinvestment when managers are concerned about exacting empty creditors.Further, we find that tournament incentives decrease credit risk when internal governance is strong or product market competition is intense. Taken together, our results suggest that creditors perceive senior manager tournament incentives (SMTI) as a critical determinant of a firm's credit risk, particularly in settings where managerial risk aversion is high. K E Y W O R D Scredit default swaps, credit risk, internal governance quality, product market competition, tournament incentives

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The Impact of News Articles and Corporate Disclosure on Credit Risk Valuation

Cited by 12 publications

References 46 publications

The Costs and Benefits of Reducing Complex Disclosures

The Costs and Benefits of Reducing Complex Disclosures

An Empirical Analysis of Market Reactions to the First Solvency and Financial Condition Reports in the European Insurance Industry

Tournament incentives and firm credit risk: Evidence from credit default swap referenced firms

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