The relevance of GAAP vs. non-GAAP net assets to creditors: An examination of the credit default swap market

Abstract

Recent empirical research examines the credit relevance of non-GAAP net assets in low and high default risk settings and finds that the credit relevance of non-GAAP net assets increases when default risk is high (Eberhart, Maxwell, & Siddique 2008; Plumlee Xie, Yan, & Yu 2015). Using the implication of debt contracting theory (Kothari, Ramanna, & Skinner 2010), we extend this research to compare and contrast the credit relevance of GAAP and non-GAAP net assets in low and high default risk settings. We evaluate the change in reliance creditors place on GAAP net assets relative to that placed on non-GAAP net assets. Using data from the credit default swap (CDS) market, we find that the reliance creditors place on GAAP net assets, relative to the reliance placed on non-GAAP net assets, increases with increases in the probability of default. These results contribute to the growing literature examining the relevance of information beyond that provided on the balance sheet.