Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps

53 Pages Posted: 14 Jan 2019 Last revised: 15 Jan 2019

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Xiang Gao

Binghamton University

Cihan Uzmanoglu

Binghamton University, The State University of New York

Date Written: January 14, 2019

Abstract

We study the influence of credit default swaps (CDS) on the intermediation of the bond issuance process. After CDS initiation, corporate bond underwriting fees are lower due to the hedging opportunities CDS provide to investors. Participation increases for bond offerings by investors facing risk-based regulatory requirements, underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable, and the underwriting quality remains unchanged. 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

Butler, Alexander W. and Gao, Xiang and Uzmanoglu, Cihan, Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps (January 14, 2019). Available at SSRN: https://ssrn.com/abstract=2902884 or http://dx.doi.org/10.2139/ssrn.2902884

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Xiang Gao

Binghamton University ( email )

PO Box 6001
Binghamton, NY 13902-6000
United States

Cihan Uzmanoglu (Contact Author)

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

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

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