Working Paper: CEPR ID: DP15668
Authors: Shinke Bartram; Jennifer Conrad; Jongsub Lee; Marti G. Subrahmanyam
Abstract: We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm. Our structural model predicts that CDS introduction increases debt capacity more when uncertainty about the credit events that trigger CDS payment is lower. Using a sample of more than 56,000 firms across 51 countries, we find that CDS increase leverage more in legal and market environments where uncertainty regarding CDS obligations is reduced and when property rights are weaker. Our results highlight the importance of legal uncertainty surrounding the interpretation of the underlying trigger events of global credit derivatives.
Keywords: credit default swaps; CDS; investment policy; financing policy; creditor rights; property rights; ownership concentration
JEL Codes: G3; F4; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CDS introduction (Y20) | increased debt capacity (G32) |
| CDS introduction (Y20) | increased leverage (G32) |
| stronger creditor rights + lower legal uncertainty (G33) | increased leverage (G32) |
| CDS introduction (Y20) | increased capital investment (E22) |
| creditor restrictions (G33) | increased capital investment (E22) |
| weaker contract enforceability + higher concentration of equity ownership (G34) | increased leverage (G32) |