Credit Default Swaps Around the World: Investment and Financing Effects

74 Pages Posted: 22 Apr 2018 Last revised: 26 Dec 2019

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance; Centre for Economic Policy Research (CEPR)

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Jongsub Lee

University of Florida - Warrington College of Business Administration

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 2019

Abstract

We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm, taking into consideration differences in firms’ local economic and legal environments. We extend the model of Bolton and Oehmke (2011) to take into account uncertainty whether the actions taken by the reference entity will trigger credit events for the CDS obligations. We test the predictions of the model in a sample of more than 56,000 firms across 50 countries over the period 2001–2015 and find substantial evidence that the introduction of CDS affects real decisions within the firm, including those regarding leverage, investment, and the riskiness of the firm’s investments. Importantly, we find that the legal and market environments in which the reference entity operates have an influence on the impact of CDS. The effect of CDS is larger in environments where uncertainty regarding CDS obligations is reduced and where CDS mitigate weak property rights. Our results shed light on the incomplete nature of CDS contracts in international capital markets, related to significant legal uncertainty surrounding the interpretation of underlying credit events.

Keywords: Credit default swaps, CDS, investment policy, financing policy, creditor rights, property rights, private credit, ownership concentration

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Conrad, Jennifer S. and Lee, Jongsub and Subrahmanyam, Marti G., Credit Default Swaps Around the World: Investment and Financing Effects (February 2019). WBS Finance Group Research Paper No. 248. Available at SSRN: https://ssrn.com/abstract=3157187 or http://dx.doi.org/10.2139/ssrn.3157187

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Jongsub Lee

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

Marti G. Subrahmanyam (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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