Credit Default Swaps and Managers’ Voluntary Disclosure

51 Pages Posted: 9 Jun 2014 Last revised: 13 Jan 2018

See all articles by Jae B. Kim

Jae B. Kim

Lehigh University - College of Business & Economics

Pervin K. Shroff

University of Minnesota - Twin Cities - Carlson School of Management

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Regina Wittenberg Moerman

University of Southern California

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2017

Abstract

We investigate how the availability of traded credit default swaps (CDSs) affects the referenced firms’ voluntary disclosure choices. CDSs enable lenders to hedge their credit risk exposure, weakening their incentives to monitor borrowers. We predict that reduced lender monitoring in turn leads shareholders to intensify their monitoring and demand increased voluntary disclosure from managers. Consistent with this expectation, we find that managers are more likely to issue earnings forecasts and forecast more frequently when traded CDSs reference their firms. We further find a stronger impact of CDS availability on firm disclosure when (i) lenders have higher ability and propensity to hedge credit risk using CDSs, and (ii) lender monitoring incentives and monitoring strength are weaker. Consistent with an increase in shareholder demand for public information disclosure induced by a reduction in lender monitoring, we find a stronger effect of CDSs on voluntary disclosure for firms with higher institutional ownership and stronger corporate governance. Overall, our findings suggest that firms with traded CDS contracts enhance their voluntary disclosure to offset the effect of reduced monitoring by CDS-protected lenders.

Keywords: the CDS market; actively traded CDS contracts; voluntary disclosures; earnings forecasts; firm-initiated press releases

JEL Classification: G14, G21, G32, M41

Suggested Citation

Kim, Jae Bum and Shroff, Pervin K. and Vyas, Dushyantkumar and Wittenberg Moerman, Regina, Credit Default Swaps and Managers’ Voluntary Disclosure (December 19, 2017). Journal of Accounting Research, 2018. Available at SSRN: https://ssrn.com/abstract=2447220 or http://dx.doi.org/10.2139/ssrn.2447220

Jae Bum Kim

Lehigh University - College of Business & Economics

621 Taylor Street
Bethlehem, PA 18015
United States

Pervin K. Shroff

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-626-1570 (Fax)

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
Mississauga, Ontario L5L 1C6
Canada

Regina Wittenberg Moerman (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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