The Exodus from Sovereign Risk: Sovereign Ceiling Violations in Credit Default Swap Markets
69 Pages Posted: 22 Mar 2013 Last revised: 9 May 2013
Date Written: May 9, 2013
This paper examines sovereign ceiling violations (SCVs) in credit default swap (CDS) markets, whereby private sector firms have lower CDS spreads relative to their sovereign counterparts with equal contractual terms. Using 5-year CDS spreads on 2,364 companies in 54 countries during 2004-2011, we find that firms exposed to better property rights institutions through their foreign asset positions (Institutional channel) and firms whose stocks are listed on exchanges with stricter disclosure requirements (Informational channel) tend to violate the sovereign ceiling rule. Our results suggest that firm-level global asset and information connections are important mechanisms to delink firms from their sovereign risk.
Keywords: Credit default swap, sovereign ceiling, transfer and convertibility risk, asset geographic location, cross-listing, property rights, creditor rights, disclosure requirement, credit rating
JEL Classification: F23, F34, F36, G01, G15, K40
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