News Sentiment, Credit Spreads, and Information Asymmetry
North American Journal of Economics and Finance, Forthcoming
50 Pages Posted: 10 Aug 2018 Last revised: 29 Feb 2020
Date Written: November 21, 2019
This paper examines how the sentiment of firm-specific news affects CDS spreads conditional on the degree of information asymmetry. Using a large set of news releases, we document a strong negative relationship between the sentiment of firm-specific news and CDS spreads. More importantly, consistent with the role of public news in reducing information asymmetry, we find evidence that the relation between news sentiment and CDS spreads is stronger for firms with higher information asymmetry. Furthermore, the relation is stronger for news with negative sentiment and during the 2008 financial crisis. Our results are robust to alternative sentiment measures.
Keywords: credit default swap, credit risk, news sentiment
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation