Abstract

This study examines investors' hedging behaviours in the credit default swap (CDS) market in response to the managerial tone of the Management Discussion and Analysis section in 10-K/Q flings. Utilising CDS positions data derived from the Depository Trust & Clearing Corporation, we first document that managerial tone is negatively associated with CDS positions. We further find that such an effect is stronger for investors with less reliable alternative information channels and for firms with greater default probability. Our inferences persist when using the abnormal tone from a two-stage analysis, when using change model regression, and when filtering out other potential confounding impacts. The results of this study advance the understanding of how the linguistic tone presented by management affects CDS market investors' hedging decision making through the use of public accounting information in financial disclosures.