Accounting-Based Versus Market-Based Cross-Sectional Models of CDS Spreads

40 Pages Posted: 9 Nov 2007

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Paul Hanouna

Villanova University - School of Business

Atulya Sarin

Santa Clara University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 2007

Abstract

The relevance of accounting data to providers of capital has been strongly debated. In this paper we provide compelling evidence that accounting metrics are important to providers of debt capital. Models of firm distress are mostly either purely accounting-based (e.g. Altman, 1968; Ohlson, 1980) or purely market-based (e.g. Merton, 1974). We examine the information content of accounting-based and market-based metrics in pricing firm distress using a sample of Credit Default Swap (CDS) spreads. Credit Default Swaps are derivatives that offer protection from the event a given firm defaults on its obligations. CDS spreads provide a clean measure of default risk as they are the compensation that market participants require for bearing that risk. Using a sample of 2,860 quarterly CDS spreads available over the period 2001-2005 we find that a model of distress which is entirely composed of accounting-based metrics performs comparably, if not better, than market-based structural models of default. Furthermore, we find that both sources of information (accounting- and market-based) are complementary in pricing distress. These results support the notion that accounting metrics have direct value- or valuation-relevance to debt holders and holders of credit derivatives.

Keywords: credit default swap, credit risk, bankruptcy prediction

JEL Classification: M41, G1, G12, C41, C52

Suggested Citation

Das, Sanjiv Ranjan and Hanouna, Paul E. and Sarin, Atulya, Accounting-Based Versus Market-Based Cross-Sectional Models of CDS Spreads (June 2007). Available at SSRN: https://ssrn.com/abstract=1028614 or http://dx.doi.org/10.2139/ssrn.1028614

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Paul E. Hanouna (Contact Author)

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Atulya Sarin

Santa Clara University - Department of Finance ( email )

Leavey School of Business and Administration
Santa Clara, CA 95053
United States
408-554-4953 (Phone)
408-904-4498 (Fax)

HOME PAGE: http://business.scu.edu/asarin

Register to save articles to
your library

Register

Paper statistics

Downloads
536
rank
47,528
Abstract Views
2,111
PlumX Metrics