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Usefulness of earnings in credit markets: Korean evidence

Author

Listed:
  • Baik, Bok
  • Kim, Young Jun
  • Kim, Jungbae
  • Lee, Su Jeong

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.

Suggested Citation

  • Baik, Bok & Kim, Young Jun & Kim, Jungbae & Lee, Su Jeong, 2015. "Usefulness of earnings in credit markets: Korean evidence," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 93-113.
    • Handle: RePEc:eee:pacfin:v:33:y:2015:i:c:p:93-113
    DOI: 10.1016/j.pacfin.2015.01.009
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    More about this item

    Keywords

    Bonds; Credit default swaps; Credit spreads; Earnings; Financial crisis;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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