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Department of Finance, Copenhagen Business School Working Paper Series, Department of Finance, Copenhagen Business School

No 2007-229:
Accounting Transparency and the Term Structure of Credit Default Swap Spreads

Claus Bajlum and Peter Tind Larsen

Abstract: This paper estimates the impact of accounting transparency on the term structure of CDS spreads for a large cross-section of rms. Using a newly developed measure of accounting transparency in Berger, Chen & Li (2006), we nd a downward-sloping term structure of transparency spreads. Estimating the gap between the high and low transparency credit curves at the 1, 3, 5, 7 and 10-year maturity, the transparency spread is insigni cant in the long end but highly signi cant and robust at 20 bps at the 1-year maturity. Furthermore, the eect of accounting transparency on the term structure of CDS spreads is largest for the most risky rms. These results are strongly supportive of the model by Du¢ e & Lando (2001), and add an explanation to the underprediction of short-term credit spreads by traditional structural credit risk models.

Keywords: na; (follow links to similar papers)

JEL-Codes: E43; G13; (follow links to similar papers)

58 pages, January 1, 2007

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