Credit Default Swaps and Firm Value

Document Type

Article

Publication Date

6-1-2018

Abstract

This article provides evidence that firm value declines when credit default swaps (CDSs) are initiated and that the effect is greater when CDS trading activity is higher. This decline, which arises from an increase in the cost of capital as opposed to a decrease in free cash flows, traces to a deterioration in the firm's credit quality and stock liquidity. Firm value declines less when CDS trading is likely to produce incremental information, suggesting that CDS trading has informational benefits for firm value. However, the evidence does not indicate that firm value increases because CDS availability facilitates investments.

Publication Source (Journal or Book title)

Journal of Financial and Quantitative Analysis

First Page

1227

Last Page

1257

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