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Accounting downside risk measures and credit spreads

Pervaiz Alam (Department of Accounting, College of Business Administration, Kent State University, Kent, Ohio, USA)
Barry Hettler (School of Accountancy, College of Business, Ohio University, Athens, Ohio, USA)
Han Gao (Department of Accounting, College of Business Administration, Kent State University, Kent, Ohio, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 16 July 2021

Issue publication date: 29 July 2021

237

Abstract

Purpose

This study aims to examine the association between predictive accounting downside risk measures and changes in credit spreads. Building upon the earnings downside risk (EDR) measure developed in prior literature, this paper introduces cash flow downside risk (CFDR).

Design/methodology/approach

This study modifies an existing empirical framework (root lower partial moment) to calculate CFDR and applies it to a sample of firms between 2002 and 2013 for which credit default swap data are available.

Findings

After validating the measure, this study identifies a positive association between CFDR and changes in credit spreads. This paper further shows the association between CFDR and credit spread changes is stronger than that between EDR and credit spread changes. Financial stability moderates the relationship between CFDR and credit spreads.

Originality/value

This study proposes a novel measure of accounting downside risk, CFDR and demonstrates a negative association between this measure and future cash flow and a positive association between this measure and future credit spreads.

Keywords

Acknowledgements

This study has been supported by the Dean’s Summer Research grant, College of Business Administration, Kent State University.

Citation

Alam, P., Hettler, B. and Gao, H. (2020), "Accounting downside risk measures and credit spreads", Review of Accounting and Finance, Vol. 20 No. 1, pp. 103-120. https://doi.org/10.1108/RAF-08-2020-0244

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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