Credit Default Swaps and Managers’ Voluntary Disclosure

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.     

Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform

In 2005, the Securities and Exchange Commission enacted the Securities Offering Reform (Reform), which relaxes “gun‐jumping” restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more preoffering disclosures after the Reform. Further, we find that these preoffering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi‐exogenous changes in voluntary disclosure on information asymmetry, and thus a firm's cost of capital.     

Determinants of the Returns-Earnings Correlation*

Abstract. The weak correlation between accounting earnings and security returns documented by numerous empirical studies is an issue of concern in current accounting research. Given that price is determined not solely by accounting earnings but also by other sources of information about future earnings, this paper focuses on the relation between earnings and other information to understand the returns-earnings association. The analysis indicates that current earnings exhibit high explanatory power for returns if they correlate with expected future earnings (or with other information that reflects expected future earnings). A high price-to-earnings (P/E) ratio coupled with a high return on equity (ROE) can ex ante indicate earnings growth, and the earnings of firms with these attributes are positively correlated with future earnings. The high-growth subset obtains an impressive returns-earnings R² of 31 percent and an earnings coefficient of 6.17, demonstrating that it is possible to identify firms whose earnings are strongly correlated with returns using a parsimonious set of firm characteristics. Résumé. La faible corrélation entre les bénéfices comptables et le rendement des titres de placement sur laquelle se sont penchés de nombreux auteurs d'études empiriques retient aujourd'hui l'attention des chercheurs en comptabilité. Le cours des titres étant déterminé non seulement par les bénéfices comptables mais aussi par d'autres sources d'information relative aux bénéfices futurs, l'auteur s'intéresse ici à la relation entre les bénéfices et d'autres renseignements, dans le but d'expliquer le lien entre rendement et bénéfices. L'analyse révèle que les bénéfices courants ont un pouvoir explicatif élevé à l'égard du rendement si ce dernier est en corrélation avec les bénéfices futurs prévus (ou avec d'autres renseignements indicateurs des bénéfices futurs prévus). Un ratio cours/bénéfice élevé associé à un rendement des capitaux propres élevé peut indiquer, ex ante, une croissance des bénéfices, et les bénéfices des entreprises qui possèdent ces caractéristiques sont en corrélation positive avec les bénéfices futurs. Le sous-groupe des entreprises à forte croissance obtient un R² étonnant de 31 pour cent, résultat d'une analyse de régression du rendement par rapport aux bénéfices, et un coefficient de bénéfices de 6,17, ce qui démontre qu'il est possible de déterminer quelles sont les entreprises dont les bénéfices présentent une forte corrélation avec le rendement, lorsqu'on utilise un ensemble parcimonieux de caractéristiques des entreprises.