Credit Derivatives and Analyst Behavior

ABSTRACT This paper presents a comprehensive analysis of the role of credit default swaps (CDS) in information production surrounding earnings announcements. First, we demonstrate that the strength of CDS price discovery prior to earnings announcements is related to the presence of private information and the illiquidity of the underlying corporate bonds, consistent with the CDS market being a preferred venue for informed trading. Next, we ask how the information revealed through CDS trading influences the output of equity and credit rating analysts. We find that post-CDS trading, the dispersion and error of earnings per share forecasts are generally reduced, and downgrades by both types of analysts become more frequent and more timely before large negative earnings surprises, suggesting that the CDS market conveys information valuable to financial analysts.

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The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109012000609 ◽

2012 ◽

Vol 48 (1) ◽

pp. 47-76 ◽

Cited By ~ 69

Author(s):

Ling Cen ◽

Gilles Hilary ◽

K. C. John Wei

Keyword(s):

Stock Returns ◽

Earnings Forecasts ◽

Equity Market ◽

Stock Splits ◽

Forecast Errors ◽

Forecast Revisions ◽

Earnings Per Share ◽

Earnings Surprises ◽

Anchoring Bias

AbstractWe test the implications of anchoring bias associated with forecast earnings per share (FEPS) for forecast errors, earnings surprises, stock returns, and stock splits. We find that analysts make optimistic (pessimistic) forecasts when a firm’s FEPS is lower (higher) than the industry median. Further, firms with FEPS greater (lower) than the industry median experience abnormally high (low) future stock returns, particularly around subsequent earnings announcement dates. These firms are also more likely to engage in stock splits. Finally, split firms experience more positive forecast revisions, more negative forecast errors, and more negative earnings surprises after stock splits.

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Earnings announcements, private information, and strategic informed trading

Journal of Financial Intermediation ◽

10.1016/j.jfi.2006.10.001 ◽

2007 ◽

Vol 16 (1) ◽

pp. 117-149 ◽

Cited By ~ 16

Author(s):

Jin-Wan Cho

Keyword(s):

Private Information ◽

Earnings Announcements ◽

Informed Trading

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Information Imprecision

The Accounting Review ◽

10.2308/tar-2018-0229 ◽

2020 ◽

pp. 0000-0000

Author(s):

Ryan T Ball ◽

Christine Cuny

Keyword(s):

Term Structure ◽

Credit Rating ◽

Credit Default Swap ◽

Empirical Measure ◽

Prior Beliefs ◽

Asset Value ◽

Credit Default ◽

Information Set ◽

Rating Changes

This study develops and applies a model-implied measure of information imprecision. We define information imprecision as the degree of noise in investors' prior beliefs about the firm's asset value based on the information set that is currently available. We present a model of credit default swap (CDS) spreads in which the term structure is a function of information imprecision. We exploit observable CDS spreads with short and long maturities to extract an empirical measure of information imprecision. We then examine the moderating role of our measure in two settings. First, we show that the equity market response to credit rating changes increases in the level of information imprecision before the announcement. Second, we show that bond-market professionals' ability to charge a premium to smaller investors, relative to larger investors, increases in the issuing firm's information imprecision. This evidence illustrates the broad applicability of our model-implied measure of information imprecision.

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