← Search

Journal of Accounting Research Vol. 56 No. 3 2018

Credit Default Swaps and Managers’ Voluntary Disclosure

Jae Bum Kim1; Pervin Shroff2; Dushyantkumar Vyas3; Regina Wittenberg-Moerman4

1 College of Business and Economics Lehigh University · 2 Carlson School of Management, University of Minnesota · 3 Department of Management – UTM & Rotman School of Management University of Toronto · 4 Marshall School of Business, University of Southern California ,

Abstract

We investigate how the availability of traded credit default swaps (CDSs) affects the referenced firms’ voluntary disclosure choices. CDSs enable lenders to hedge their credit risk exposure, weakening their incentives to monitor borrowers. We predict that reduced lender monitoring in turn leads shareholders to intensify their monitoring and demand increased voluntary disclosure from managers. Consistent with this expectation, we find that managers are more likely to issue earnings forecasts and forecast more frequently when traded CDSs reference their firms. We further find a stronger impact of CDS availability on firm disclosure when (1) lenders have higher ability and propensity to hedge credit risk using CDSs, and (2) lender monitoring incentives and monitoring strength are weaker. Consistent with an increase in shareholder demand for public information disclosure induced by a reduction in lender monitoring, we find a stronger effect of CDSs on voluntary disclosure for firms with higher institutional ownership and stronger corporate governance. Overall, our findings suggest that firms with traded CDS contracts enhance their voluntary disclosure to offset the effect of reduced monitoring by CDS‐protected lenders.

DOI
10.1111/1475-679x.12194
Volume
56
Issue
3
Pages
953-988
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite