2018
DOI: 10.1111/acfi.12368
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The pricing of accruals quality in credit default swap spreads

Abstract: 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… Show more

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Cited by 3 publications
(6 citation statements)
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References 87 publications
(151 reference statements)
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“…Thus, we believe the CDS market is a preferable setting in which to test the effect of ABDR on firm credit spreads [6]. Prior research finds the CDS market responds to earnings (Callen et al , 2009) and accruals quality (Alam et al , 2020). We test whether it is further responsive to accounting-based downside risk.…”
Section: Literature Review Hypotheses Development and Variable Constructionmentioning
confidence: 99%
See 2 more Smart Citations
“…Thus, we believe the CDS market is a preferable setting in which to test the effect of ABDR on firm credit spreads [6]. Prior research finds the CDS market responds to earnings (Callen et al , 2009) and accruals quality (Alam et al , 2020). We test whether it is further responsive to accounting-based downside risk.…”
Section: Literature Review Hypotheses Development and Variable Constructionmentioning
confidence: 99%
“…The credit spread model we estimate is sourced from Alam et al (2020) and Callen et al (2009). where CS is the credit spread for firm i in period t .…”
Section: Models Sample Selection and Validity Analysismentioning
confidence: 99%
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“…Similarly, while Bharath et al (2008) test private loans and public bonds separately, they include all loan types reported in the DealScan database and do not test credit lines alone. Using a different credit market, Alam et al (2018) examine the effect of accounting quality on credit default swap spreads. relation between accruals quality and the cost of debt specifically for credit lines.…”
Section: Accounting Quality and Access To Credit Linesmentioning
confidence: 99%
“…While the literature suggests a negative relationship between accounting quality and the cost of debt in general (e.g., Francis et al , 2005; Bharath et al , 2008; Gray et al , 2009; Alam et al , 2018), prior studies do not separate credit lines from other debt types in the tests. As discussed above, insurance‐like credit lines are different from other debt types, and therefore banks may consider accounting quality differently when offering credit lines.…”
Section: Background and Hypothesis Developmentmentioning
confidence: 99%