Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps
65 Pages Posted: 14 Jan 2019 Last revised: 9 Aug 2019
Date Written: January 14, 2019
We study the influence of credit default swaps (CDS) initiation and trading on the intermediation of the bond issuance process. After CDS initiation, corporate bond underwriting fees paid by CDS firms decline by 12-28% (8-20 basis points). Underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable. In bond offerings, participation by investors facing risk-based regulatory requirements increases after CDS initiation. Our evidence suggests that CDS-driven innovations in risk sharing contribute to the transactional efficiency of the market by reducing the financial intermediation costs of placing bonds.
Keywords: Credit default swaps; Financial innovation; Financial intermediation; Underwriting fees; Issuance costs; Corporate bonds; Hedging credit risk; Transaction costs; Bond Ownership
JEL Classification: G20; G24; G32
Suggested Citation: Suggested Citation