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The effects of credit default swaps on corporate investment

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  • Jieying Hong
  • Na Wang

Abstract

This paper examines how credit default swaps (CDS) affect the corporate investment of the referenced entities. We document a significant reduction in corporate investment after CDS trading, a result that is robust to alternative model specifications and a set of endogeneity tests. Our findings of the increased firm risk and cost of capital support the costly external capital channel. The cross-sectional variations in CDS effects demonstrate that both reduced monitoring and the empty creditor problem might be the underlying forces driving the costly external capital channel. Our additional analysis implies that CDS trading is associated with an enhancement in investment efficiency for firms that are prone to overinvestment.

Suggested Citation

  • Jieying Hong & Na Wang, 2021. "The effects of credit default swaps on corporate investment," The European Journal of Finance, Taylor & Francis Journals, vol. 27(3), pages 260-277, February.
  • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:3:p:260-277
    DOI: 10.1080/1351847X.2020.1806092
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    Cited by:

    1. Wen, Jun & Farooq, Umar & Tabash, Mosab I. & El Refae, Ghaleb A. & Ahmed, Jaleel & Subhani, Bilal Haider, 2021. "Government green environmental concerns and corporate real investment decisions: Does financial sector development matter?," Energy Policy, Elsevier, vol. 158(C).
    2. Wajih Abbassi & Sabri Boubaker & Wael Louhichi, 2024. "Why do corporate social responsibility‐oriented companies opt for bond debt? Evidence from crisis periods," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1534-1568, April.
    3. Naceur Essaddam & Miran Hossain & Tashfeen Hussain, 2023. "Do credit default swaps impact lenders’ monitoring of loans?," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 567-600, August.
    4. Burak Pirgaip & Lamija Rizvić, 2023. "The Impact of Integrated Reporting on the Cost of Capital: Evidence from an Emerging Market," JRFM, MDPI, vol. 16(7), pages 1-20, June.

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