Credit Risk and IFRS: The Case of Credit Default Swaps

51 Pages Posted: 6 Aug 2010 Last revised: 18 Feb 2014

See all articles by Gauri Bhat

Gauri Bhat

Southern Methodist University (SMU) - Accounting Department

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Dan Segal

Interdisciplinary Center (IDC) Herzliyah

Date Written: February 16, 2014

Abstract

This study compares the pricing of credit risk information conveyed by accounting numbers under IFRS relative to local GAAP. We measure the price of credit risk by CDS spreads and focus on three fundamental accounting metrics that inform about credit risk: earnings, leverage and book value equity. Using a difference in differences methodology, we find that while earnings, book value and, to a lesser extent, leverage are significant determinants of credit risk pricing both prior to and after IFRS adoption, the adoption of IFRS did not change the credit risk informativeness of these accounting variables as reflected in CDS spreads. This conclusion is robust to controlling for institutional differences among countries as well as a battery of sensitivity analyses.

Keywords: Credit Default Swaps, Credit Risk, IFRS

JEL Classification: M41

Suggested Citation

Bhat, Gauri and Callen, Jeffrey L. and Segal, Dan, Credit Risk and IFRS: The Case of Credit Default Swaps (February 16, 2014). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1653887 or http://dx.doi.org/10.2139/ssrn.1653887

Gauri Bhat

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-7682964 (Phone)

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Dan Segal

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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