Spillover Effects of Credit Default Swaps on Corporate Disclosure along the Supply Chain

48 Pages Posted: 21 Nov 2018 Last revised: 29 Dec 2020

See all articles by Matthew C. Cedergren

Matthew C. Cedergren

Santa Clara University

Ting Luo

Tsinghua University

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Yue Zhang

Lingnan University

Date Written: December 24, 2020

Abstract

We investigate the effect of customers’ CDS referencing on suppliers’ management forecasting activity. We argue that customers’ CDS referencing increases the suppliers’ business volatility and thus forecasting difficulty, and at the same time, the information from customers’ CDS market reduces investors’ demand for the suppliers’ disclosure and induces the suppliers to scale back their own disclosure. We find consistent evidence that firms that derive a greater proportion of their revenue from CDS-referenced customers tend to reduce their frequency of forecast issuance. This relationship is stronger when the supplier’s business relies more on CDS-referenced customers (thus strengthening the effect of customer CDS referencing on suppliers’ forecasting difficulty), while the relationship is weaker when customers have more analyst following (thus resulting in less incremental information produced by customer CDS referencing). Further analysis shows that the negative relationship between forecasting activity and exposure to CDS-referenced customer firms is driven by good news forecasts, possibly due to the higher litigation risk associated with disclosing good news and withholding bad news. Our findings add to the literature examining the spillover effects of CDSs on entities outside those directly referenced by CDSs.

Keywords: corporate disclosure; credit default swaps; customer-supplier relationship; externalities

JEL Classification: M41, L14

Suggested Citation

Cedergren, Matthew C. and Luo, Ting and Wu, Jing and Zhang, Yue, Spillover Effects of Credit Default Swaps on Corporate Disclosure along the Supply Chain (December 24, 2020). Available at SSRN: https://ssrn.com/abstract=3274954 or http://dx.doi.org/10.2139/ssrn.3274954

Matthew C. Cedergren (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

Ting Luo

Tsinghua University ( email )

Weilun #201,School of Economics and Management
Beijing, 100084
China

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.jingwulab.org

Yue Zhang

Lingnan University ( email )

8 Castle Peak Road, Fu Tei
00000
Hong Kong
852-26168164 (Phone)

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