The Effect of CDS Initiation on the Quality of Earnings Forecasts

Abstract

The authors examine the relationship between credit default swaps (CDS) initiation and managers’ earnings forecast choices with different corporate governance structures. The authors expect that corporate governance plays a significant role in managers’ disclosure behavior as well as CDS initiation. The findings suggest that CDS initiation and managers’ earnings forecast behavior are positively associated. Firms with a strong monitoring mechanism issue a higher number of earnings forecasts and also issue forecasts more frequently when there is a traded CDS contract in the market. Additionally, the results suggest that managers issue more accurate earnings forecasts. Overall, these findings imply that the role of managers is important to mitigate the information asymmetry between individual and institutional investors when there is a new financial instrument because the development of the regulations and market rules for these instruments takes a longer time.

Citation

Ekici, E. and Sottile, P. (2023), "The Effect of CDS Initiation on the Quality of Earnings Forecasts", Shawver, T.J. (Ed.) Research on Professional Responsibility and Ethics in Accounting (Research on Professional Responsibility and Ethics in Accounting, Vol. 25), Emerald Publishing Limited, Leeds, pp. 127-147. https://doi.org/10.1108/S1574-076520230000025006