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.
Bibliographical noteFunding Information:
The Spanish Ministerio de Econom?a y Competitividad (MINECO), the former Ministerio de Ciencia e Innovaci?n and FEDER funding (ENE2012-37431-C03-03 and ENE2015-66975-C3) are thanked for the financial support and for the FPI predoctoral aid awarded to A. Moral (BES-2013-062799).
Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2017
- CDS market
- CDS trading initiation
- bank monitoring
- credit default swaps
- earnings forecasts
- management forecasts
- private lender monitoring
- voluntary disclosures