Credit Protection and Animal Spirits: Product Market Competition with CDS
57 Pages Posted: 27 Mar 2018 Last revised: 18 Feb 2020
Date Written: February 17, 2020
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
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