Credit Default Swaps and Analyst Optimism

42 Pages Posted: 7 May 2019

See all articles by Suresh Govindaraj

Suresh Govindaraj

Rutgers University - Rutgers Business School - Newark and New Brunswick

Yubin Li

Harbin Institute of Technology, Shenzhen

Chen Zhao

Rutgers University - Rutgers Business School - Newark and New Brunswick

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: April 4, 2019

Abstract

This paper investigates whether and how the initiation of Credit Default Swaps (CDS) trading affects analyst optimism. First, we document that analyst forecasts become less optimistic after the initiation of CDS trading. Second, we find that the dampening effect of CDS on analyst optimism is stronger for firms with negative news and for firms with poorer financial performance or higher leverage, supporting a “correction effect” of CDS on non-strategic optimism. Moreover, we find that CDS also has a “disciplining effect” on strategic optimism that arises from incentives to cultivate relation with management or to please institutional investors. Overall, our evidence shows that the CDS market not only provides important information for analysts, but also alters analysts’ reporting incentives.

Keywords: credit default swaps, analyst forecast, optimism

JEL Classification: G10, G14, G24, M40, M41, M43

Suggested Citation

Govindaraj, Suresh and Li, Yubin and Zhao, Chen and Zhong, Zhaodong, Credit Default Swaps and Analyst Optimism (April 4, 2019). Available at SSRN: https://ssrn.com/abstract=3367823 or http://dx.doi.org/10.2139/ssrn.3367823

Suresh Govindaraj

Rutgers University - Rutgers Business School - Newark and New Brunswick ( email )

1 Washington Park
Room #934
Newark, NJ 07102
United States

Yubin Li

Harbin Institute of Technology, Shenzhen ( email )

University Town
Nanshan District
Shenzhen, Guangdong 518055
China

Chen Zhao

Rutgers University - Rutgers Business School - Newark and New Brunswick ( email )

923A
1 Washington Park
Newark, NJ NJ 07102
United States
732-789-3686 (Phone)

Zhaodong Zhong (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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