Default risk and earnings expectations: The role of contract maturity in the credit default swap market
Department
School of Accountancy
Document Type
Article
Publication Date
1-1-2023
Abstract
Agency conflicts increase with contract maturity. As contract maturity increases, managers, acting on behalf of shareholders, have more opportunities to use their discretion in ways that adversely affect future payoffs. Agency theory suggests that when contract maturity increases, creditors place less weight on a firm's growth opportunities in assessing default risk. We present a counter-argument: because the timing of future payoffs is uncertain, longer-duration debt provides creditors with a longer horizon over which payoffs are earned. Using credit default swap (CDS) spreads, we demonstrate that the relevance of future earnings expectations increases with CDS maturity. Our results suggest that contract maturity is not a reliable proxy for agency costs when evaluating the credit market relevance of financial information.
Journal Title
Accounting and Finance
Journal ISSN
08105391
Digital Object Identifier (DOI)
10.1111/acfi.13093