Usefulness of earnings in credit markets: Korean evidence

• This study examines both credit default swap (CDS) and bond markets to test the value relevance of earnings information.
• Earnings are value relevant in the long window for both CDSs and bonds.
• Earnings information is impounded into CDS premia but not into bond spreads in the short window.
• Earnings information is more useful in pricing both CDSs and bonds during the financial crisis.
• The extent of usefulness of earnings depends on the type of credit product and credit market conditions.

This study examines both credit default swap (CDS) and bond markets to test the value relevance of earnings information. Using a sample of firms listed on the Korea Exchange (KRX) from the fourth quarter of 2007 to the fourth quarter of 2012, we find that earnings are value relevant in the long window for both CDSs and bonds. However, in the short window, earnings information is impounded into CDS premia but not into bond spreads. This supports prior studies that find timelier price discovery in CDS markets compared with bond markets. In addition, we provide evidence that earnings information is more useful in pricing both CDSs and bonds during the financial crisis. Overall, our findings suggest that earnings provide useful information to the credit market and that the extent of its usefulness depends on the type of credit product and market conditions.