CDS channels of influence on discretionary accruals
Existing studies indicated that firm debt holders can use the credit default swap (CDS) market to hedge their credit risk, and thus they would reduce their monitoring of the firms, leading to largely distressed firms shirking and increasing positive abnormal earnings accruals. Besides providing insu...
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sg-smu-ink.lkcsb_research-80142024-03-20T01:26:34Z CDS channels of influence on discretionary accruals CHENG, Hao LIM, Kian Guan Existing studies indicated that firm debt holders can use the credit default swap (CDS) market to hedge their credit risk, and thus they would reduce their monitoring of the firms, leading to largely distressed firms shirking and increasing positive abnormal earnings accruals. Besides providing insurance, however, the CDS spreads also perform price discovery of credit risk information sought by trade creditors and potential lenders who are not protected. High absolute abnormal discretionary accruals or bad earnings quality, especially negative abnormal accruals, would lead adverse CDS price signals that are very costly to the firm. This compels the firm under nondistressed conditions to be able to improve cash holdings, cash flows, working capital, and earnings reporting quality. Our new results indicate that the channels of improvement in earnings quality are through a firm's large accounts payable and low cash holdings related to trade credit exposures. In the longer run, this leads to higher profitability and improved firm value. Thus, the generation of public information via the CDS market reduces information asymmetry and can enforce greater discipline in discretionary accounts reporting. 2022-03-01T08:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/7015 info:doi/10.1177/0148558X221081990 https://ink.library.smu.edu.sg/context/lkcsb_research/article/8014/viewcontent/CDS_ChannelsInfluence_sv.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University credit default swaps earnings quality absolute abnormal earnings accruals trade credit exposures risk management Corporate Finance Finance and Financial Management |
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credit default swaps earnings quality absolute abnormal earnings accruals trade credit exposures risk management Corporate Finance Finance and Financial Management CHENG, Hao LIM, Kian Guan CDS channels of influence on discretionary accruals |
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Existing studies indicated that firm debt holders can use the credit default swap (CDS) market to hedge their credit risk, and thus they would reduce their monitoring of the firms, leading to largely distressed firms shirking and increasing positive abnormal earnings accruals. Besides providing insurance, however, the CDS spreads also perform price discovery of credit risk information sought by trade creditors and potential lenders who are not protected. High absolute abnormal discretionary accruals or bad earnings quality, especially negative abnormal accruals, would lead adverse CDS price signals that are very costly to the firm. This compels the firm under nondistressed conditions to be able to improve cash holdings, cash flows, working capital, and earnings reporting quality. Our new results indicate that the channels of improvement in earnings quality are through a firm's large accounts payable and low cash holdings related to trade credit exposures. In the longer run, this leads to higher profitability and improved firm value. Thus, the generation of public information via the CDS market reduces information asymmetry and can enforce greater discipline in discretionary accounts reporting. |
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CHENG, Hao LIM, Kian Guan |
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CHENG, Hao LIM, Kian Guan |
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CHENG, Hao |
title |
CDS channels of influence on discretionary accruals |
title_short |
CDS channels of influence on discretionary accruals |
title_full |
CDS channels of influence on discretionary accruals |
title_fullStr |
CDS channels of influence on discretionary accruals |
title_full_unstemmed |
CDS channels of influence on discretionary accruals |
title_sort |
cds channels of influence on discretionary accruals |
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Institutional Knowledge at Singapore Management University |
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2022 |
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https://ink.library.smu.edu.sg/lkcsb_research/7015 https://ink.library.smu.edu.sg/context/lkcsb_research/article/8014/viewcontent/CDS_ChannelsInfluence_sv.pdf |
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