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
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: Suggested Citation