Credit Protection and Animal Spirits: Product Market Competition with CDS

57 Pages Posted: 27 Mar 2018 Last revised: 18 Feb 2020

See all articles by Jay Y. Li

Jay Y. Li

University of North Carolina at Greensboro

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Date Written: February 17, 2020

Abstract

We find that firms’ market share grows significantly faster if they have credit default swaps (CDS) traded on their debt. We use multiple approaches including overlap weighting analysis to draw causal inference about the effect of CDS on market share. CDS-referenced firms achieve growth by reducing markups, developing new products, and encroaching rivals’ product space. The CDS effects are more pronounced for firms with greater technological uncertainties and in industries with more growth opportunities. Our findings are consistent with the view that the availability of CDS mitigates creditors’ agency concerns and encourages product innovations. Overall, we provide novel evidence of increase in consumer welfare associated with financial market innovations.

Keywords: Credit Default Swaps, Product Market, Agency

Suggested Citation

Li, Jay Y. and Tang, Dragon Yongjun, Credit Protection and Animal Spirits: Product Market Competition with CDS (February 17, 2020). Available at SSRN: https://ssrn.com/abstract=3150217 or http://dx.doi.org/10.2139/ssrn.3150217

Jay Y. Li (Contact Author)

University of North Carolina at Greensboro ( email )

Department of Accounting and Finance
Greensboro, NC
United States
336 334 5647 (Phone)

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

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