The Pricing of Accruals Quality in Credit Default Swap Spreads

35 Pages Posted: 6 Oct 2020

See all articles by Pervaiz Alam

Pervaiz Alam

Kent State University

Xiaoling Pu

Kent State University - Department of Finance

Barry Hettler

affiliation not provided to SSRN

Hai Lin

Victoria University of Wellington - School of Economics & Finance

Date Written: September 1, 2020

Abstract

We examine the association between accounting information risk, measured with accruals quality (AQ), and credit spreads, primarily measured with credit default swap (CDS) spreads. Theoretically, AQ measures the precision with which accruals map into cash flows. Better AQ implies a more precise estimate of future cash flows and, we predict, a reduction in credit spreads due to resulting lower uncertainty regarding the ability to meet debt interest and principal payments. In support of this hypothesis, we find a negative relationship between AQ and CDS spreads whereby better AQ is associated with lower CDS spreads. Additionally, we investigate the components of total AQ and find that innate AQ is more strongly associated with CDS spreads than is discretionary AQ. We further show that AQ moderates the market's pricing of earnings: the relationship between earnings and CDS spreads weakens as AQ worsens. Together, our results indicate that accounting information risk is priced in credit spreads and that the CDS market responds not only to the level of earnings, but the quality thereof as well.

Keywords: CDS spreads, Information risk, Accruals quality, Innate accruals, Discretionary accruals

Suggested Citation

Alam, Pervaiz and Pu, Xiaoling and Hettler, Barry and Lin, Hai, The Pricing of Accruals Quality in Credit Default Swap Spreads (September 1, 2020). Accounting & Finance, Vol. 60, Issue 3, pp. 1943-1977, 2020, Available at SSRN: https://ssrn.com/abstract=3704314 or http://dx.doi.org/10.1111/acfi.12368

Pervaiz Alam

Kent State University ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1121 (Phone)
330-672-2548 (Fax)

Xiaoling Pu

Kent State University - Department of Finance ( email )

College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States

Barry Hettler (Contact Author)

affiliation not provided to SSRN

Hai Lin

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
241
PlumX Metrics