Common-wide information flow in CDS markets: The case of earnings surprises of industry leaders

Published in: Investment Analysts Journal
Volume 45, issue 2, 2016 , pages: 63–80
DOI: 10.1080/10293523.2015.1125062
Author(s): Paulo Pereira da SilvaCMVM-Portuguese Securities Commission, Rua Laura Alves n.° 4, Lisbon, Portugal


This paper examines the way common-wide information is disseminated in credit default swap (CDS) markets. I find strong supporting evidence that earnings announcements of CDS references with greater liquidity and higher credit risk help in predicting the subsequent CDS spread movements of their industry peers. This is consistent with the notion that the earnings announcements of certain firms may contain valuable market- and industry-wide information, which may be utilised afterwards to appraise the financial situation and the creditworthiness of industry peers, thereby influencing their CDS rates. Another major finding is that this common-wide information seems to be impounded with a lag into the CDS rates of industry peers. That pattern appears to be more pronounced for negative than for positive earnings surprises. The lag in the response to earnings surprises is higher among firms of the financial, cyclical consumer and energy sectors, and almost non-existent for firms of the sectors of technology and utilities. Attention costs and market frictions seem to fuel the pattern of under-reaction of CDS spreads to these earnings announcements.

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