Credit Default Swaps and Firm Value

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Posted: 31 May 2017 Last revised: 20 Dec 2017

See all articles by Rajesh Narayanan

Rajesh Narayanan

Louisiana State University

Cihan Uzmanoglu

Binghamton University, The State University of New York

Date Written: April 25, 2017

Abstract

This paper provides evidence that firm value declines when credit default swaps (CDS) are initiated, and that the effect is greater when CDS trading activity is higher. This decline, which arises from an increase in the cost of capital as opposed to a decrease in free cash flows, traces to a deterioration in the firm’s credit quality and stock liquidity. Firm value declines less when CDS trading is likely to produce incremental information, suggesting that CDS trading has informational benefits for firm value. However, the evidence does not indicate that firm value increases because CDS availability facilitates investments.

Keywords: Credit default swaps (CDSs); Firm value; Cost of capital; Cost of debt; Cost of equity; Financial distress; Empty creditor hypothesis

JEL Classification: G32; G33; G14

Suggested Citation

Narayanan, Rajesh and Uzmanoglu, Cihan, Credit Default Swaps and Firm Value (April 25, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2679520 or http://dx.doi.org/10.2139/ssrn.2679520

Rajesh Narayanan

Louisiana State University ( email )

Baton Rouge, LA 70803-6308
United States
225-578-6236 (Phone)

Cihan Uzmanoglu (Contact Author)

Binghamton University, The State University of New York ( email )

Binghamton, NY 13902-6001
United States
607 777 66 38 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
742
PlumX Metrics