Credit Derivatives and Analyst Behavior
59 Pages Posted: 11 Mar 2012 Last revised: 9 Dec 2015
Date Written: November 25, 2015
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: Suggested Citation