Document Type

Article

Publication Date

10-2016

Abstract

We examine the impact of analysts’ earnings per share (EPS) and cash flow per share (CPS) forecast revisions on the market for credit default swaps. Earnings and cash flows directly affect the level of firm assets and equity, and prior theoretical and empirical work demonstrates they are important factors in the determination of credit spreads. Accordingly, if analysts’ forecasts and forecast revisions represent new and unexpected information, credit default swap (CDS) spreads are likely to respond. We find that while the issuance of both EPS and CPS forecast revisions relate inversely with changes in CDS spreads, cash flow forecast revisions have a larger effect, on average. We also find that the relationship between CPS forecast revisions and CDS spreads tends to be stronger in cases of financial distress. Furthermore, we do not observe an immediate significant reaction in the CDS market to analysts’ recommendation changes. Our study provides evidence that cash flow forecasts dominate earnings forecasts in some situations and that participants in the CDS market discriminate between forms of analyst output.

Comments

An earlier version of this paper was presented at the 2015 American Accounting Association (AAA) Ohio Region meeting, 2015 AAA annual meeting, and at the Accounting and Finance Research Workshop, University of Toledo. We are also thankful for comments and suggestions received from Z. Kaplan and T. White. This research was partly funded by the Dean’s Summer Research Fund, College of Business Administration, Kent State University.

Citation/Publisher Attribution

Alam, P., Pu, X., & Hettler, B. (2016). The sensitivity of the credit default swap market to financial analysts’ forecast revisions. Accounting & Finance.

Publisher Statement

"This is the peer-reviewed version of the following article:

Alam, P., Pu, X., & Hettler, B. (2016). The sensitivity of the credit default swap market to financial analysts’ forecast revisions. Accounting & Finance.

which has been published in final form at https://doi.org/10.1111/acfi.12235. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions."

Available for download on Wednesday, October 31, 2018

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