The Leverage Externalities of Credit Default Swaps

76 Pages Posted: 20 Oct 2013 Last revised: 7 Nov 2014

See all articles by Jay Y. Li

Jay Y. Li

University of North Carolina at Greensboro

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 6, 2014

Abstract

This paper provides the first empirical evidence of the externalities of credit default swaps (CDS). We find that a firm’s leverage is lower when a larger proportion of its revenue derives from customers referenced by CDS. This finding is robust to alternative samples and measures, placebo tests, and the selection of customers by suppliers. Moreover, firms affected by customer CDS trading increase equity issuance and reduce investment, which is consistent with the view that CDS trading on customers improves the information environment for suppliers and provides information about customer default risk. Therefore, while many firms are not directly linked to CDS trading, CDS trading on their customers has spillover effects on these firms’ financial policies.

Keywords: credit default swaps, CDS, customer-supplier relationship, leverage, externalities

JEL Classification: G10, G32, L11

Suggested Citation

Li, Jay Y. and Tang, Dragon Yongjun, The Leverage Externalities of Credit Default Swaps (November 6, 2014). Available at SSRN: https://ssrn.com/abstract=2342478 or http://dx.doi.org/10.2139/ssrn.2342478

Jay Y. Li (Contact Author)

University of North Carolina at Greensboro ( email )

Department of Accounting and Finance
Greensboro, NC
United States
336 334 5647 (Phone)

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

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