Accounting downside risk measures and credit spreads

Pervaiz Alam, Barry Hettler and Han Gao

Review of Accounting and Finance, 2021, vol. 20, issue 1, 103-120

Abstract: Purpose - This study aims to examine the association between predictive accounting downside risk measures and changes in credit spreads. Building upon the earnings downside risk (EDR) measure developed in prior literature, this paper introduces cash flow downside risk (CFDR). Design/methodology/approach - This study modifies an existing empirical framework (root lower partial moment) to calculate CFDR and applies it to a sample of firms between 2002 and 2013 for which credit default swap data are available. Findings - After validating the measure, this study identifies a positive association between CFDR and changes in credit spreads. This paper further shows the association between CFDR and credit spread changes is stronger than that between EDR and credit spread changes. Financial stability moderates the relationship between CFDR and credit spreads. Originality/value - This study proposes a novel measure of accounting downside risk, CFDR and demonstrates a negative association between this measure and future cash flow and a positive association between this measure and future credit spreads.

Keywords: Credit spreads; Cash flow downside risk; Credit default swap; Earnings downside risk (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-08-2020-0244

DOI: 10.1108/RAF-08-2020-0244

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