The Real Effects of Credit Default Swaps

72 Pages Posted: 20 Feb 2015 Last revised: 26 Dec 2019

See all articles by Andras Danis

Andras Danis

Georgia Institute of Technology - Scheller College of Business

Andrea Gamba

University of Warwick - Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: October 6, 2017

Abstract

We examine the effect of introducing credit default swaps (CDSs) on firm value. Our model allows for dynamic investment and financing, and bondholders can trade in the CDS market. The model incorporates both negative and positive effects of CDSs. CDS markets lead to more liquidations, but they also reduce the probability of costly debt renegotiation and reduce costly equity financing. After calibrating the model, we find that firm value increases by 2.9% on average with the introduction of a CDS market. Firms also invest more and increase leverage. The effect on firm value is strongest for small, financially constrained, and low productivity firms.

Keywords: Credit default swaps, CDS, Empty creditor, Restructuring, Bankruptcy

JEL Classification: G33, G34

Suggested Citation

Danis, Andras and Gamba, Andrea, The Real Effects of Credit Default Swaps (October 6, 2017). Journal of Financial Economics (JFE), 2017, Available at SSRN: https://ssrn.com/abstract=2566830 or http://dx.doi.org/10.2139/ssrn.2566830

Andras Danis (Contact Author)

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

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Atlanta, GA 30308
United States

HOME PAGE: http://scheller.gatech.edu/danis

Andrea Gamba

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

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