'Less is More': Credit Default Swaps and Firm Cyclicality
42 Pages Posted: 11 Mar 2021
Date Written: March 9, 2021
Firm cyclicality decreases by around 40% after the inception of credit default swap (CDS) trading. The effect is due to CDS firms’ lower asset growth-GDP growth sensitivity in good times and stronger for firms facing a more severe exacting creditor problem, i.e., those with powerful shareholders, high industry Q, high liquidation costs and low ratings. Moreover, CDS trading impedes unhealthy growth and increases profitability and market value. The effect is not due to lower M&A activity of CDS firms and robust before and after the global financial crisis. The evidence highlights an important disciplining effect of CDS on corporate growth.
Keywords: Credit default swaps, real effects of financial markets, exacting creditors, asset growth, employment growth
JEL Classification: G32, G33, G34
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