Has the CDS Market Lowered the Cost of Corporate Debt?
Adam B. Ashcraft
Federal Reserve Bank of New York
João A. C. Santos
Federal Reserve Bank of New York; New University of Lisbon - Nova School of Business and Economics
Many have claimed that credit default swaps (CDSs) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. This paper evaluates the impact that the onset of CDS trading has on the spreads that underlying firms pay to raise funding in the corporate bond and syndicated loan markets. Employing a range of methodologies, we fail to find evidence that the onset of CDS trading lowers the cost of debt financing for the average borrower. Further, we uncover economically significant adverse effects on risky and informationally opaque firms.
Number of Pages in PDF File: 44
Keywords: Credit default swaps, loan spreads, credit spreads.
JEL Classification: G24, G32.working papers series
Date posted: June 21, 2007 ; Last revised: September 16, 2009
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