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Credit default swaps and firm risk

Author

Listed:
  • Hai Lin
  • Binh Hoang Nguyen
  • Junbo Wang
  • Cheng Zhang

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.

Suggested Citation

  • Hai Lin & Binh Hoang Nguyen & Junbo Wang & Cheng Zhang, 2023. "Credit default swaps and firm risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1668-1692, November.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:11:p:1668-1692
    DOI: 10.1002/fut.22452
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