Has the CDS Market Lowered the Cost of Corporate Debt?
Posted: 23 Sep 2009
Date Written: September 22, 2009
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: Suggested Citation