Credit Default Swaps and Corporate Debt Structure

2018 ◽  
Author(s):  
Yangyang Chen ◽  
Walid Saffar ◽  
Chenyu Shan ◽  
Sarah Qian Wang
Keyword(s):  
Credit Default Swaps ◽  
Corporate Debt ◽  
Debt Structure ◽  
Credit Default

Credit Default Swaps on Corporate Debt and the Pricing of Audit Services

2017 ◽  
Vol 37 (3) ◽  
pp. 117-144 ◽  
Author(s):  
Lijing Du ◽  
Adi Masli ◽  
Felix Meschke
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Credit Default Swaps ◽  
Corporate Debt ◽  
Professional Skepticism ◽  
External Auditors ◽  
Corporate Default ◽  
Audit Fee ◽  
Credit Default ◽  
Jel Classifications

SUMMARY Previous studies document that lenders lack incentives to monitor borrowing firms or to make concessions during bankruptcy if these lenders insure against corporate default with credit default swaps (CDS). This article investigates whether external auditors increase their audit fees for those client firms that have their debt referenced by CDS. In a comprehensive sample of U.S. companies from 2001–2015, we find that CDS-referenced companies incur larger audit fees compared to companies without CDS. The economic magnitude of the audit fee increase ranges from 5.4 percent to 11 percent, depending on the econometric specification employed. Deteriorating corporate conditions or other observable characteristics do not explain the positive association between CDS trading and audit fees, or the increase in audit fees following CDS initiations. The findings suggest that auditors increase their professional skepticism and monitoring efforts of CDS-referenced clients; they might also expect higher liability losses. JEL Classifications: G10; G30; G33; G34.

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