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    The Sensitivity of the CDS Market to Financial Analysts’ Forecast Revisions

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    Author
    Alam, Pervaiz
    Pu, Xiaoling
    Hettler, Barry
    Keyword
    Forecast Revisions
    Earnings Per Share
    Cash Flow Per Share
    Credit Default Swap
    Journal title
    Accounting and Finance
    Date Published
    2016-10-01
    
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    URI
    http://hdl.handle.net/20.500.12648/2097
    Abstract
    We examine the impact of analysts’ earnings per share (EPS) and cash flow per share (CPS) forecast revisions on the market for credit default swaps. Earnings and cash flows directly affect the level of firm assets and equity, and prior theoretical and empirical work demonstrates they are important factors in the determination of credit spreads. Accordingly, if analysts’ forecasts and forecast revisions represent new and unexpected information, credit default swap (CDS) spreads are likely to respond. We find that while the issuance of both EPS and CPS forecast revisions relate inversely with changes in CDS spreads, cash flow forecast revisions have a larger effect, on average. We also find that the relationship between CPS forecast revisions and CDS spreads tends to be stronger in cases of financial distress. Furthermore, we do not observe an immediate significant reaction in the CDS market to analysts’ recommendation changes. Our study provides evidence that cash flow forecasts dominate earnings forecasts in some situations and that participants in the CDS market discriminate between forms of analyst output.
    Citation
    Alam, P., Pu, X., & Hettler, B. (2016). The sensitivity of the credit default swap market to financial analysts’ forecast revisions. Accounting & Finance .
    DOI
    https://doi.org/10.1111/acfi.12235
    Description
    "This is the peer-reviewed version of the following article: Alam, P., Pu, X., & Hettler, B. (2016). The sensitivity of the credit default swap market to financial analysts’ forecast revisions. Accounting & Finance . which has been published in final form at https://doi.org/10.1111/acfi.12235 . This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions." --- An earlier version of this paper was presented at the 2015 American Accounting Association (AAA) Ohio Region meeting, 2015 AAA annual meeting, and at the Accounting and Finance Research Workshop, University of Toledo. We are also thankful for comments and suggestions received from Z. Kaplan and T. White. This research was partly funded by the Dean’s Summer Research Fund, College of Business Administration, Kent State University.
    ae974a485f413a2113503eed53cd6c53
    https://doi.org/10.1111/acfi.12235
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    Business-Economics Faculty Publications

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