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Can credit default swaps exert an enduring monitoring influence on political integrity?

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  • Hsien-Yi Chen

    (Providence University)

  • Sheng-Syan Chen

    (National Taiwan University)

Abstract

Exploiting the launch of U.S. state credit default swaps (CDS) to study how financial market monitoring affects local political integrity, we show that CDS-referenced states are associated with reduced corruption conviction rates of local government officials by about 28% post-launch compared to non-CDS-referenced states. The effect on curbing corruption persists up to six years after CDS issuance. Improved transparency of government fiscal information is the primary mechanism through which CDS inception affects corruption. We conclude that credit market innovation creates positive and enduring externalities for political integrity.

Suggested Citation

  • Hsien-Yi Chen & Sheng-Syan Chen, 2023. "Can credit default swaps exert an enduring monitoring influence on political integrity?," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 445-469, February.
    • Handle: RePEc:kap:rqfnac:v:60:y:2023:i:2:d:10.1007_s11156-022-01100-9
    DOI: 10.1007/s11156-022-01100-9
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    More about this item

    Keywords

    Credit default swaps; Public corruption; Government information transparency;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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