Exodus from Sovereign Risk: Global Asset and Information Networks in the Pricing of Corporate Credit Risk

Abstract

Using 5-year credit default swap (CDS) spreads on 2,364 companies in 54 countries during 2004-2011, we show firms exposed to better property rights institutions through their foreign asset positions (Institutional channel) and firms whose stocks are cross-listed on exchanges with stricter disclosure requirements (Informational channel) reduce their CDS spreads by 40 bps for a one standard deviation increase in their exposure on the two channels. These channels capture distinct effects beyond those associated with firm- and country-level fundamentals. Overall, we find that firm-level global asset and information connections are important mechanisms to delink firms from their sovereign and country risks.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2635548

Keywords: International CDS markets, corporate credit risk, sovereign risk, country risk, multinational corporations, asset geographic location, cross-listing, property rights, creditor rights, disclosure requirements, sovereign ceiling violations

JEL Classification: F23, F34, F36, G01, G15, K40