Credit Derivatives and Analyst Behavior

59 Pages Posted: 11 Mar 2012 Last revised: 9 Dec 2015

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: November 25, 2015

Abstract

This paper presents a comprehensive analysis of the role of credit default swaps (CDS) in information production surrounding earnings announcements. First, we demonstrate that the strength of CDS price discovery prior to earnings announcements is related to the presence of private information and the illiquidity of the underlying corporate bonds, consistent with the CDS market being a preferred venue for informed trading. Next, we ask how the information revealed through CDS trading influences the output of equity and credit rating analysts. We find that post-CDS trading, the dispersion and error of earnings-per-share forecasts are generally reduced, and downgrades by both types of analysts become more frequent and more timely before large negative earnings surprises, suggesting that the CDS market conveys information valuable to financial analysts.

Keywords: credit default swap; informed trading; earnings announcement; analyst forecast; buy/sell recommendation; rating downgrade

JEL Classification: D82, G13, G14

Suggested Citation

Batta, George E. and Qiu, Jiaping and Yu, Fan, Credit Derivatives and Analyst Behavior (November 25, 2015). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 2012-03. Available at SSRN: https://ssrn.com/abstract=2019807 or http://dx.doi.org/10.2139/ssrn.2019807

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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