Credit Default Swaps Around the World

Review of Financial Studies, forthcoming.

NYU Stern School of Business

WBS Finance Group Research Paper

61 Pages Posted: 17 Jul 2020 Last revised: 1 Sep 2021

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

Jennifer S. Conrad

University of North Carolina at Chapel Hill; University of North Carolina Kenan-Flagler Business School

Jongsub Lee

Seoul National University; University of Florida - Warrington College of Business Administration

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 25, 2020

Abstract

We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm and the influence of firms’ local economic and legal environments on that impact. We extend the model of Bolton and Oehmke (2011) to take into account uncertainty about whether the actions taken by the reference entity will trigger credit events for CDS obligations. We test the predictions of our model in a sample of more than 56,000 firms across 51 countries over the period 2001–2015 and find substantial evidence that the introduction of CDS affects real decisions. Importantly, we find that the legal and market environments in which reference entities operate 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 weak property rights are mitigated by CDS. Our results shed light on the incomplete nature of CDS contracts in international capital markets, which is 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, ownership concentration

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Conrad, Jennifer S. and Conrad, Jennifer S. and Lee, Jongsub and Subrahmanyam, Marti G., Credit Default Swaps Around the World (June 25, 2020). Review of Financial Studies, forthcoming., NYU Stern School of Business, WBS Finance Group Research Paper, Available at SSRN: https://ssrn.com/abstract=3635305 or http://dx.doi.org/10.2139/ssrn.3635305

Söhnke M. Bartram

University of Warwick ( email )

Warwick Business School
Finance Group
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

University of North Carolina at Chapel Hill ( email )

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

Jongsub Lee

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

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) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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