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Clear(ed) Decision: The Effect of Central Clearing on Firms Financing Decision

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  • Maximilian Jager
  • Frederick Zadow

Abstract

Does credit derivative market regulation affect corporate finance decisions? We investigate this question in the setting of the central counterparty (CCP) clearing reform on the corporate credit default swap (CDS) market. Exploiting the staggered introduction of CCP clearing to CDS contracts – an insurance against firm default – we uncover a shift in the debt composition of firms with adverse real economic consequences. Firms whose CDS contracts are eligible for clearing with the monopolist CCP lose bond market funding, but increase their demand for bank loans. Insufficient bank credit supply forces firms to shrink their balance sheet, cut investment and become less profitable. We theoretically motivate two potential channels of effect from clearing firms’ CDS contracts onto bond demand. The empirical evidence strongly supports an “arbitrage channel”: lower counterparty risk on the centrally cleared CDS market attracts investors away from the bond market.

Suggested Citation

  • Maximilian Jager & Frederick Zadow, 2023. "Clear(ed) Decision: The Effect of Central Clearing on Firms Financing Decision," CRC TR 224 Discussion Paper Series crctr224_2023_445, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2023_445
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    More about this item

    Keywords

    central clearing; firm capital structure; financial regulation; real effects;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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