Withholding Bad News in the Face of Credit Default Swaps Trading: Evidence from Stock Price Crash Risk

Journal of Financial and Quantitative Analysis, Forthcoming

68 Pages Posted: 15 Jul 2017 Last revised: 1 Sep 2022

See all articles by Jinyu Liu

Jinyu Liu

University of International Business and Economics (UIBE) - School of Banking and Finance

Jeffrey Ng

The University of Hong Kong - Faculty of Business and Economics

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Rui Zhong

The University of Western Australia - UWA Business School

Date Written: August 29, 2022

Abstract

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.

Keywords: credit default swap; stock price crash risk; price discovery; bad news hoarding

JEL Classification: G10; G14; G32; M41

Suggested Citation

Liu, Jinyu and Ng, Jeffrey and Tang, Dragon Yongjun and Zhong, Rui, Withholding Bad News in the Face of Credit Default Swaps Trading: Evidence from Stock Price Crash Risk (August 29, 2022). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3003369 or http://dx.doi.org/10.2139/ssrn.3003369

Jinyu Liu

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street, Chaoyang District
Beijing, 100029
China

Jeffrey Ng

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Dragon Yongjun Tang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

Rui Zhong

The University of Western Australia - UWA Business School ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

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