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Has the CDS market lowered the cost of corporate debt?

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Author Info

  • Ashcraft, Adam B.
  • Santos, João A.C.

Abstract

Many have claimed that credit default swaps (CDSs) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. This paper evaluates the impact that the onset of CDS trading has on the spreads that underlying firms pay to raise funding in the corporate bond and syndicated loan markets. Employing a range of methodologies, we fail to find evidence that the onset of CDS trading lowers the cost of debt financing for the average borrower. Further, we uncover economically significant adverse effects on risky and informationally opaque firms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 4 (May)
Pages: 514-523

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Handle: RePEc:eee:moneco:v:56:y:2009:i:4:p:514-523

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Credit default swaps Loan spreads Credit spreads;

References

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  1. Gregory R. Duffee and Chunsheng Zhou., 1999. "Credit Derivatives in Banking: Useful Tools for Managing Risk?," Research Program in Finance Working Papers RPF-289, University of California at Berkeley.
  2. Norden, Lars & Weber, Martin, 2004. "Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements," CEPR Discussion Papers 4250, C.E.P.R. Discussion Papers.
  3. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
  4. Norden, Lars & Wagner, Wolf, 2008. "Credit derivatives and loan pricing," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2560-2569, December.
  5. Beverly Hirtle, 2008. "Credit derivatives and bank credit supply," Staff Reports 276, Federal Reserve Bank of New York.
  6. Galina Hale & Joao A. C. Santos, 2008. "Do banks price their informational monopoly?," Working Paper Series 2008-14, Federal Reserve Bank of San Francisco.
  7. Acharya, Viral V & Johnson, Tim, 2005. "Insider Trading in Credit Derivatives," CEPR Discussion Papers 5180, C.E.P.R. Discussion Papers.
  8. Guillaume Plantin & Christine A Parlour, . "Credit Risk Transfer," GSIA Working Papers 2005-E45, Carnegie Mellon University, Tepper School of Business.
  9. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
  10. Stewart Mayhew & Vassil Mihov, 2004. "How Do Exchanges Select Stocks for Option Listing?," Journal of Finance, American Finance Association, vol. 59(1), pages 447-471, 02.
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Citations

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Cited by:
  1. Hendrik Hakenes & Isabel Schnabel, 2009. "Credit Risk Transfer and Bank Competition," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2009_33, Max Planck Institute for Research on Collective Goods.
  2. Ilhyock Shim & Haibin Zhu, 2010. "The impact of CDS trading on the bond market: evidence from Asia," BIS Working Papers 332, Bank for International Settlements.
  3. Nada Mora, 2010. "Lender exposure and effort in the syndicated loan market," Research Working Paper RWP 10-12, Federal Reserve Bank of Kansas City.
  4. Joshua Slive & Jonathan Witmer & Elizabeth Woodman, 2012. "Liquidity and Central Clearing: Evidence from the CDS Market," Working Papers 12-38, Bank of Canada.

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