Credit Derivatives and Firm Investment

55 Pages Posted: 25 Feb 2017 Last revised: 15 Feb 2019

See all articles by George E. Batta

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: February 2, 2019

Abstract

We examine the effect of credit default swap (CDS) trading on firm investment, finding a post-CDS introduction decrease in debt issuance and acquisitions, which remains robust to propensity score matching, instrumenting CDS introduction, and controlling for past investment and financing activities. Further analysis reveals a CDS introduction-year increase in debt financing and acquisitions, for which we could not eliminate reverse causality as a potential explanation. Overall, the ex post increase in bankruptcy risk and debt overhang likely plays a dominant role in the investment effect of CDS, while the expansion in credit supply due to a reduction of strategic default or regulatory capital requirement appears less important.

Keywords: Credit default swaps, firm investment, acquisitions, debt issuance, bankruptcy risk, debt overhang

JEL Classification: G31, G32, G34

Suggested Citation

Batta, George E. and Yu, Fan, Credit Derivatives and Firm Investment (February 2, 2019). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 2923236. Available at SSRN: https://ssrn.com/abstract=2923236 or http://dx.doi.org/10.2139/ssrn.2923236

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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