Beating Market Expectations, Analysts’ Forecasts Dispersion and the Pricing of Credit Default Swaps

The purpose of this paper is to study the impact of beating analysts' forecasts and the impact of analysts' forecast dispersion on the pricing of firms' credit default swaps (CDSs). CDS premium is the compensation required by investors for bearing firms' credit default risk. Sell-side analysts collect market, industry and firm information and provide important information in the form of stock recommendations, stock price targets and accounting number forecasts. For that reason, the information contained in their forecasts may provide additional information to investors to price CDSs. My results show that firms that beat analysts' earnings and revenue forecasts, and firms with less dispersed analysts' earnings and revenue forecasts have on average a reduction in their CDS premia around the earnings announcement date. These effects are stronger for firm that jointly beat the two forecasts and for firms with high risk of default. I also document that the effect of beating analysts' earnings (revenue) forecasts is stronger for firms with more (less) earnings quality