 Credit default swaps and corporate performance smoothingWei-Shao Wu, Robert C.W. Fok, Yuanchen Chang and Chao-Jung Chen Journal of Corporate Finance, 2022, vol. 75, issue C Abstract: This study examines whether the availability of traded credit default swaps (CDS) influences the referenced firms' incentive to smooth their performance. We show that with the introduction of CDS trading on their debt, CDS-referenced firms (CDS firms) lower both their earnings and cash flow volatility. Specifically, earnings volatility declines faster than cash flow volatility, which is consistent with income smoothing behavior. The effect of CDS trading on performance smoothing is qualitatively similar under different market and economic conditions. These results support the notion that CDS firms smooth their performance to avoid renegotiation with CDS-protected creditors. We also find that CDS firms smooth their cash flows via hedging with derivatives and smooth their earnings using discretionary accruals after the inception of CDS trading. Keywords: Credit default swaps; Cash flow volatility; Income smoothing; Earnings management; Corporate hedging (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:75:y:2022:i:c:s0929119922000815 DOI: 10.1016/j.jcorpfin.2022.102238 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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