Credit Default Swaps and Firm Risk

Hai Lin; Binh Hoang Nguyen; Junbo Wang; Cheng Zhang

doi:10.1002/fut.22452

Credit Default Swaps and Firm Risk

Hai Lin, Binh Hoang Nguyen^*, Junbo Wang, Cheng Zhang

^*Corresponding author for this work

Department of Economics and Finance

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

1 Citation (Scopus)

65 Downloads (CityUHK Scholars)

Abstract

This study investigates how initiating a credit default swap (CDS) affects firm risk. Using the firm value volatility as a measure of firm risk, we document that firm risk decreases following the commencement of CDS trading. Further analysis indicates that the empty creditor channel, which arises when a debt holder with CDS protection has no interest in preserving the company it provides funds, is the primary way of influence. Our findings reveal a significant impact of financial innovation on a firm's behavior. We also document that market frictions affect the degree of such effect. © 2023 The Authors. The Journal of Futures Markets published by Wiley Periodicals LLC.

Original language	English
Pages (from-to)	1668-1692
Number of pages	25
Journal	Journal of Futures Markets
Volume	43
Issue number	11
Online published	17 Jul 2023
DOIs	https://doi.org/10.1002/fut.22452
Publication status	Published - Nov 2023

Research Keywords

credit default swap
credit quality
empty creditor
financial constraint
firm value volatility

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This full text is made available under CC-BY-NC-ND 4.0. https://creativecommons.org/licenses/by-nc-nd/4.0/

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abstract = "This study investigates how initiating a credit default swap (CDS) affects firm risk. Using the firm value volatility as a measure of firm risk, we document that firm risk decreases following the commencement of CDS trading. Further analysis indicates that the empty creditor channel, which arises when a debt holder with CDS protection has no interest in preserving the company it provides funds, is the primary way of influence. Our findings reveal a significant impact of financial innovation on a firm's behavior. We also document that market frictions affect the degree of such effect. {\textcopyright} 2023 The Authors. The Journal of Futures Markets published by Wiley Periodicals LLC.",

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AB - This study investigates how initiating a credit default swap (CDS) affects firm risk. Using the firm value volatility as a measure of firm risk, we document that firm risk decreases following the commencement of CDS trading. Further analysis indicates that the empty creditor channel, which arises when a debt holder with CDS protection has no interest in preserving the company it provides funds, is the primary way of influence. Our findings reveal a significant impact of financial innovation on a firm's behavior. We also document that market frictions affect the degree of such effect. © 2023 The Authors. The Journal of Futures Markets published by Wiley Periodicals LLC.

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KW - credit quality

KW - empty creditor

KW - financial constraint

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M3 - RGC 21 - Publication in refereed journal

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JO - Journal of Futures Markets

JF - Journal of Futures Markets

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ER -

Credit Default Swaps and Firm Risk

Abstract

Research Keywords

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