Document Type

Article

Publication Date

5-3-2018

Abstract

We examine the association between accounting information risk, measured with accruals quality (AQ), and credit spreads, primarily measured with credit default swap (CDS) spreads. Theoretically, AQ measures the precision with which accruals map into cash flows. Better AQ implies a more-precise estimate of future cash flows, and, we predict, a reduction in credit spreads due to resulting lower uncertainty regarding the ability to meet debt interest and principal payments. In support of this hypothesis, we find a negative relationship between AQ and CDS spreads whereby better AQ is associated with lower CDS spreads. Additionally, we investigate the components of total AQ and find that innate AQ is more strongly associated with CDS spreads than is discretionary AQ. We further show that AQ moderates the market’s pricing of earnings: the relationship between earnings and CDS spreads weakens as AQ worsens. Together, our results indicate that accounting information risk is priced in credit spreads and that the CDS market responds not only to the level of earnings, but the quality thereof as well.

Comments

Data Availability: Data used in this study are available from public sources.

JEL Codes: M41, G13, G20, G32

An earlier version of this paper was presented at the 2014 Ohio American Accounting Association Regional meeting, 2014 American Accounting Association annual meeting, and 2014 Southern Finance Association annual meeting. This study has been supported by the Dean’s Summer Research grant, College of Business Administration, Kent State University.

Citation/Publisher Attribution

Alam, P., Pu, X., Hettler, B., & Lin, H. (2018). The pricing of accruals quality in credit default swap spreads. Accounting & Finance.

Publisher Statement

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

Alam, P., Pu, X., Hettler, B., & Lin, H. (2018). The pricing of accruals quality in credit default swap spreads. Accounting & Finance.

which has been published in final form at https://doi.org/10.1111/acfi.12368. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions."

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