Accounting Information Quality and CDS Term Structure

43 Pages Posted: 28 Jul 2016 Last revised: 7 Feb 2022

See all articles by Aytekin Ertan

Aytekin Ertan

London Business School

Stephen A. Karolyi

Office of the Comptroller of the Currency

Kalin S. Kolev

City University of New York (CUNY) - Stan Ross Department of Accountancy

Date Written: April 4, 2018

Abstract

We empirically examine the relationship between accounting information quality and the term structure of credit default swap (CDS) spreads. To do so, we capitalize on Flatness—a market-driven and theoretically motivated measure of information quality, which we construct as the ratio of short-term to long-term CDS spreads. Our evidence indicates that Flatness reflects accounting information quality as follows: (i) it increases when the analysts’ consensus earnings forecast is likely achieved via accruals management; (ii) earnings response coefficients decrease in Flatness; and (iii) the predictability of earnings for future cash flow decreases in Flatness. Our findings indicate that Flatness correlates predictably with the quality of accounting information, offering support for Duffie and Lando’s (2001) theory and subsequent research that builds on it.

Keywords: accounting information quality, credit default swaps, term structure, meeting or beating analysts’ consensus, earnings management, ERC, the predictive ability of earnings

JEL Classification: D80, G10, M41

Suggested Citation

Ertan, Aytekin and Karolyi, Stephen A. and Kolev, Kalin S., Accounting Information Quality and CDS Term Structure (April 4, 2018). Available at SSRN: https://ssrn.com/abstract=2815022 or http://dx.doi.org/10.2139/ssrn.2815022

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
442070008131 (Phone)

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Kalin S. Kolev (Contact Author)

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

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

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