Intangible assets and default risk: an examination of the credit default swap market

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University of Alabama Libraries

In this study I examine the impact of intangible assets on default risk. Extant research primarily focuses on the relevancy of intangible assets in the equity markets, but the relevance of intangible assets in the credit markets has not been extensively explored. In fact, due to the differences between equity and debt, it is not apparent that the relevance of intangible assets would be the same for the equity and credit markets. Using data from the credit default swap (CDS) market, I provide evidence that both capitalized and uncapitalized intangible assets reduce default risk and that uncapitalized intangible assets are just as relevant to the CDS market as the items capitalized on the balance sheet. I also find that, uncapitalized intangible assets are more relevant for high default risk firms compared to low default risk firms and less relevant for high growth firms compared to low growth firms. Finally, I provide evidence of a market inefficiency for those firms with a low risk of default. Specifically, the CDS market appears to overreact to changes in debt but underreact to changes in uncapitalized intangible assets. This finding suggests that credit markets, similar to equity markets, would benefit from additional disclosures of intangible assets which are currently not capitalized.

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