Related Securities and Equity Market Quality: The Case of CDS

62 Pages Posted: 15 Aug 2010 Last revised: 26 Oct 2015

See all articles by Ekkehart Boehmer

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Heather Tookes

Yale University - Yale School of Management; Yale University - International Center for Finance

Date Written: June 26, 2013

Abstract

We document that the emergence of markets for single-name credit default swap (CDS) contracts adversely affects equity market quality. The finding that firms with traded CDS contracts on their debt have less liquid equity and less efficient stock prices is robust across a variety of market quality measures. We analyze the potential mechanisms driving this result and find evidence consistent with negative trader-driven information spillovers that result from the introduction of CDS. These spillovers greatly outweigh the potentially positive effects associated with completing markets (i.e., CDS markets increase hedging opportunities) when firms and their equity markets are “bad” states. In “good” states, we find some evidence that CDS markets can be beneficial.

Suggested Citation

Boehmer, Ekkehart and Chava, Sudheer and Tookes, Heather, Related Securities and Equity Market Quality: The Case of CDS (June 26, 2013). Available at SSRN: https://ssrn.com/abstract=1658694 or http://dx.doi.org/10.2139/ssrn.1658694

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Heather Tookes (Contact Author)

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

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