Accounting Data Transparency and Credit Spreads: Clinical Studies

The contribution takes up the analysis of behavior of credit derivatives (CDS) and equity in the major events of credit risk financial crises (Tyco, Enron, Worldcom, Parmalat) in the presence of incomplete accounting information. Using CDS data, the fair value of debt is computed and subtracted from the quasi-value of debt, extracted from balance sheet data, to provide a measure of credit risk implied in the CDS market. We then study the joint dynamics of equity and credit risk. We find evidence of negative co-movement, even though this is mainly due to the long term components of the variables. Finally, we address the question whether one variable is Granger-caused by the other. The evidence is that CDS do not Granger-cause the stock market, pointing to the fact that there does not seem to be information advantage between the two markets.