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

Published online by Cambridge University Press:  14 February 2023

Jinyu Liu ,
Jeffrey Ng ,
Dragon Yongjun Tang Open the ORCID record for Dragon Yongjun Tang [Opens in a new window]  and
Rui Zhong
Jinyu Liu
Affiliation:
University of International Business and Economics jinyu.liu@uibe.edu.cn
Jeffrey Ng
Affiliation:
University of Hong Kong jeffngty@hku.hk
Dragon Yongjun Tang*
Affiliation:
University of Hong Kong
Rui Zhong*
Affiliation:
University of Western Australia
*
yjtang@hku.hk (corresponding author)
rui.zhong@uwa.edu.au (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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Credit default swaps (CDSs) 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 557 - 595
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Cristian Badarinza, Stephen Brown, Jennifer Conrad (the editor), Zhiguo He, Leslie Hodder, Jongsub Lee (the referee), Xingguo Luo, Tak-Yuen Wong, Lu Xing, Colin Zeng, Liandong Zhang, Yongmin Zhang, and Lei Zhao, as well as seminar and conference participants at Monash University, the University of Queensland, the University of Technology Sydney, the University of Western Australia, the 2017 International Conference on Futures and other Derivatives, the 2017 Financial System Engineering and Risk Management Conference, the 2017 Chinese Finance Annual Conference, the 2017 International Finance and Banking Society Conference, the 2017 Paris-Asia Conference in Quantitative Finance, the 2018 European Accounting Association Conference, the 2020 Chinese Accounting and Finance Review (CAFR)Virtual Annual Conference, and the 2017 International Risk Management Conference for their helpful discussion and useful comments. Tang acknowledges support from the Research Grants Council of Hong Kong (GRF Project HKU 17510016 and T35-710/20-R). Zhong thanks the National Natural Science Foundation of China (Project No. 71501197) and the University of Western Australia for their generous research grants. Liu acknowledges support from the National Natural Science Foundation of China (Nos. 72173022 and 71803018), the University of International Business and Economics project for Outstanding Young Scholars (No. 20JQ04), and “the Fundamental Research Funds for the Central Universities” in UIBE (No. CXTD13-02).

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