Are Credit Markets Tone Deaf? Evidence from Credit Default Swaps

40 Pages Posted: 8 Jan 2019 Last revised: 16 May 2019

See all articles by Hitesh Doshi

Hitesh Doshi

University of Houston - C.T. Bauer College of Business

Saurin Patel

Ivey Business School, Western University

Srikanth Ramani

University of New Brunswick - Saint John

Matthew Sooy

Richard Ivey School of Business - University of Western Ontario

Date Written: February 1, 2019

Abstract

We examine credit market responses to the linguistic tone of disclosures made in 10-Q/K fillings, controlling for the information content conveyed in the reports. Examining windows around quarterly filings, we find that uncertain tone levels are associated with changes in credit default swap (CDS) spreads and are incremental to price changes implied via equity market responses to the same information. We also observe that the magnitude of the relationship varies according to contract attributes specific to debt, with price responses monotonically increasing as CDS contracts approach maturity and as they approach default. Our results are robust to other sources of risk such as earnings surprises and management guidance, and to alternative proxies of uncertainty and other linguistic dimensions. Our finding is consistent with market participants linking uncertainty in disclosure language to firms' default risk, implying that the tone of accounting disclosures provides valuable incremental information to the CDS markets.

Keywords: Textual Analysis, Default Risk, Uncertainty, Tone, Accounting Disclosure

JEL Classification: D81, D83, G12, G14, M41

Suggested Citation

Doshi, Hitesh and Patel, Saurin and Ramani, Srikanth and Sooy, Matthew Thomas, Are Credit Markets Tone Deaf? Evidence from Credit Default Swaps (February 1, 2019). 2019 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=3311776 or http://dx.doi.org/10.2139/ssrn.3311776

Hitesh Doshi

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Saurin Patel

Ivey Business School, Western University ( email )

1255 Western Road
Room 2303
London, Ontario N6G 0N1
Canada
519-661-4195 (Phone)

Srikanth Ramani

University of New Brunswick - Saint John ( email )

Saint John, Canada
Saint John, New Brunswick E2L 4L5
Canada

Matthew Thomas Sooy (Contact Author)

Richard Ivey School of Business - University of Western Ontario ( email )

London, Ontario
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
82
Abstract Views
715
rank
315,541
PlumX Metrics