TY - JOUR
T1 - Withholding Bad News in the Face of Credit Default Swap Trading
T2 - Evidence from Stock Price Crash Risk
AU - Liu, Jinyu
AU - Ng, Jeffery
AU - Tang, Dragon
AU - Zhong, Rui
PY - 2023/2/14
Y1 - 2023/2/14
N2 - Credit default swaps (CDS) are a major financial innovation related to debt contracting. Because CDS markets facilitate bad news being incorporated into equity prices via cross-market information spillover, CDS availability may curb firms’ information hoarding. We find that CDS trading on a firm’s debt reduces the future stock price crash risk. This effect is stronger in active CDS markets, when the main lenders are CDS market dealers with securities trading subsidiaries, or when managers have more motivation to hoard information. Our findings suggest that debt market financial innovations curtail the negative equity market effects of firms withholding bad news.
AB - Credit default swaps (CDS) are a major financial innovation related to debt contracting. Because CDS markets facilitate bad news being incorporated into equity prices via cross-market information spillover, CDS availability may curb firms’ information hoarding. We find that CDS trading on a firm’s debt reduces the future stock price crash risk. This effect is stronger in active CDS markets, when the main lenders are CDS market dealers with securities trading subsidiaries, or when managers have more motivation to hoard information. Our findings suggest that debt market financial innovations curtail the negative equity market effects of firms withholding bad news.
UR - http://www.scopus.com/inward/record.url?scp=85148598297&partnerID=8YFLogxK
UR - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3003369
U2 - 10.1017/S002210902300008X
DO - 10.1017/S002210902300008X
M3 - Article
SN - 0022-1090
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
ER -