Credit Default Swaps and Corporate Innovation

63 Pages Posted: 17 Mar 2017 Last revised: 4 Dec 2017

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Sarah Qian Wang

University of Warwick - Warwick Business School

Kuo Zhang

Xiamen University, School of Economics & WISE

Wenrui Zhang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: November 4, 2017

Abstract

We show that credit default swap (CDS) trading on a firm’s debt positively influences its technological innovation output measured by patents and patent citations. This positive effect is more pronounced in firms relying more on debt financing or being more subject to continuous monitoring by lenders prior to CDS trade initiation. Moreover, after CDS trade initiation, firms pursue more risky and original innovations and generate patents with higher economic value. Further analysis suggests that CDSs improve borrowing firms’ innovation output by enhancing lenders’ risk tolerance and borrowers’ risk taking in the innovation process rather than by increasing R&D investment. Taken together, our findings reveal the real effects of CDSs on companies’ investments and technological progress.

Keywords: Credit Default Swaps; Corporate Innovation; Risk Taking

JEL Classification: G32, G34, O31

Suggested Citation

Chang, Xin and Chen, Yangyang and Wang, Sarah Qian and Zhang, Kuo and Zhang, Wenrui, Credit Default Swaps and Corporate Innovation (November 4, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2933943 or http://dx.doi.org/10.2139/ssrn.2933943

Xin Chang

Nanyang Business School ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Sarah Qian Wang

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Kuo Zhang

Xiamen University, School of Economics & WISE ( email )

Xiamen, Fujian 361005
China

Wenrui Zhang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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