'Less is More': Credit Default Swaps and Firm Cyclicality

42 Pages Posted: 11 Mar 2021

See all articles by Lars Norden

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Chao Yin

Durham University - Department of Economics and Finance

Lei Zhao

ESCP Business School

Date Written: March 9, 2021

Abstract

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

Suggested Citation

Norden, Lars and Yin, Chao and Zhao, Lei, 'Less is More': Credit Default Swaps and Firm Cyclicality (March 9, 2021). Available at SSRN: https://ssrn.com/abstract=3801151 or http://dx.doi.org/10.2139/ssrn.3801151

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Chao Yin

Durham University - Department of Economics and Finance ( email )

Durham, DH1 3HY
United Kingdom

Lei Zhao

ESCP Business School ( email )

79 Avenue de la République
Paris, 75011
France

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