Has the CDS Market Lowered the Cost of Corporate Debt?

Posted: 23 Sep 2009

See all articles by Adam B. Ashcraft

Adam B. Ashcraft

Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: September 22, 2009

Abstract

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.

Keywords: Credit default swaps, loan spreads, credit spreads

JEL Classification: G24, G32

Suggested Citation

Ashcraft, Adam B. and Santos, João A. C., Has the CDS Market Lowered the Cost of Corporate Debt? (September 22, 2009). Journal of Monetary Economics, Vol. 56, No. 4, 2009. Available at SSRN: https://ssrn.com/abstract=1477142

Adam B. Ashcraft

Federal Reserve Bank of New York ( email )

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João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

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United States
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