Usefulness of earnings in credit markets: Korean evidence

Bok Baik, Young Jun Kim, Jungbae Kim and Su Jeong Lee

Pacific-Basin Finance Journal, 2015, vol. 33, issue C, 93-113

Abstract: This study examines both credit default swap (CDS) and bond markets to test the value relevance of earnings information. Using a sample of firms listed on the Korea Exchange (KRX) from the fourth quarter of 2007 to the fourth quarter of 2012, we find that earnings are value relevant in the long window for both CDSs and bonds. However, in the short window, earnings information is impounded into CDS premia but not into bond spreads. This supports prior studies that find timelier price discovery in CDS markets compared with bond markets. In addition, we provide evidence that earnings information is more useful in pricing both CDSs and bonds during the financial crisis. Overall, our findings suggest that earnings provide useful information to the credit market and that the extent of its usefulness depends on the type of credit product and market conditions.

Keywords: Bonds; Credit default swaps; Credit spreads; Earnings; Financial crisis (search for similar items in EconPapers)
JEL-codes: G13 G32 M41 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:33:y:2015:i:c:p:93-113

DOI: 10.1016/j.pacfin.2015.01.009

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