Credit default swap spreads and annual report readability

• Main Authors: HU, Nan, LIU, Ling, ZHU, Lu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Credit default swap (CDS); Credit risk; Annual report readability; 10-K; Databases and Information Systems; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/sis_research/8038
• Institution: Singapore Management University

This paper investigates whether annual report readability matters to CDS market participants and how it affects their evaluation on a firm's credit risk, as measured by CDS spreads. We find that the less readable the annual reports, the higher the CDS spreads. Furthermore, the impact of readability on CDS spreads is more concentrated on firms with high information asymmetry and with investment grade ratings. Our results suggest that investors take into account the readability in their view of the firms' credit risk. Creditors appear to suffer higher cost on CDS protection of the debts if the underlying firms have less readable annual reports.