Financial Statement Comparability and Credit Risk

47 Pages Posted: 27 Jun 2012 Last revised: 12 Jan 2013

See all articles by Seil Kim

Seil Kim

Baruch College, City University of New York

Pepa Kraft

HEC Paris

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Date Written: November 6, 2012

Abstract

Prior research shows that firms' financial statement comparability improves the accuracy of market participants' valuation judgments and thus may reduce firms' costs of capital. Distinct from prior research focusing on the equity market, we develop measures of comparability relevant to debt market participants based on the within-industry variability of Moody's adjustments to reported accounting numbers for the purposes of credit rating. We examine two sets of adjustments: (1) to the interest coverage ratio and (2) for non-recurring income items. We validate these comparability measures by providing evidence that greater comparability is associated with lower frequency and magnitude of split ratings by credit rating agencies. We predict and find that greater comparability is associated with: (1) lower estimated bid-ask spreads for traded bonds, (2) lower credit spreads for both bonds and five-year credit default swaps, and (3) a steeper one- to five-year credit default swap term structure. Our results are consistent with financial statement comparability reducing debt market participants' uncertainty about and pricing of firms' credit risk.

Keywords: Comparability, corporate credit risk, credit rating agency, bond market liquidity

JEL Classification: M4, G33

Suggested Citation

Kim, Seil and Kraft, Pepa and Ryan, Stephen G., Financial Statement Comparability and Credit Risk (November 6, 2012). Available at SSRN: https://ssrn.com/abstract=2094637 or http://dx.doi.org/10.2139/ssrn.2094637

Seil Kim

Baruch College, City University of New York ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Pepa Kraft (Contact Author)

HEC Paris ( email )

Jouy-en-Josas
France
644161543 (Phone)

HOME PAGE: http://www.hec.edu/Faculty-Research/Faculty-Directory/KRAFT-Pepa2

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

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