Credit Default Swaps and Managers’ Voluntary Disclosure |
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| Authors: | JAE B KIM PERVIN SHROFF DUSHYANTKUMAR VYAS REGINA WITTENBERG‐MOERMAN |
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| Affiliation: | 1. College of Business and EconomicsLehigh University;2. Carlson School of ManagementUniversity of Minnesota;3. Department of Management – UTM & Rotman School of ManagementUniversity of Toronto;4. Marshall School of BusinessUniversity of Southern California |
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| 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. |
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| Keywords: | G14 G20 G21 G23 G32 M40 M41 CDS market credit default swaps CDS trading initiation bank monitoring private lender monitoring voluntary disclosures earnings forecasts management forecasts |
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