Does CDS market price intangible asset value? Evidence from SG&A expenditure

Prior studies document that SG&A expenditure (exclusive of R&D and advertising expenditure) creates an intangible asset value despite that U.S. GAAP requires SG&A to be expensed immediately as a period cost. In this paper, we investigate whether the credit default swap (CDS) market recognizes the intangible asset value of SG&A expenditure. Our findings show that although the CDS market views contemporaneous SG&A expenditure as a risk factor on average, it does recognize the intangible asset value created by SG&A. Specifically, the positive association between CDS spread and SG&A expenditure is weaker for firms with higher SG&A intangible asset value. This suggests that SG&A’s intangible asset value helps mitigate credit risk. We also document that such mitigation effect is stronger when the accounting information of the reference entity is more transparent and when the reference entity is more financially constrained. Our inferences remain when we: (1) examine the short window CDS market reaction to SG&A information around SEC filing dates, and (2) use total SG&A expenditure including R&D and advertising in our analysis. Overall, this study shows that the credit market differentiates between the expense and the asset components of SG&A expenditure and lowers the risk assessment of firms with higher intangible asset values.