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Credit Default Swaps around the World

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Listed:
  • Söhnke M Bartram
  • Jennifer Conrad
  • Jongsub Lee
  • Marti G Subrahmanyam

Abstract

We analyze the impact of the introduction of credit default swaps (CDSs) on real decision-making within the firm. Our structural model predicts that CDS introduction increases debt capacity more when uncertainty about the credit events that trigger CDS payment is lower. Using a sample of more than 56,000 firms across 51 countries, we find that CDSs increase leverage more in legal and market environments where uncertainty about CDS obligations is reduced and when property rights are weaker. Our results highlight the importance of legal uncertainty in the interpretation of the underlying trigger events of global credit derivatives.

Suggested Citation

  • Söhnke M Bartram & Jennifer Conrad & Jongsub Lee & Marti G Subrahmanyam, 2022. "Credit Default Swaps around the World," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2464-2524.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:5:p:2464-2524.
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    Cited by:

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    3. Clark, Brian & Donato, James & Francis, Bill B., 2023. "Credit default swaps and debt specialization," Journal of Financial Intermediation, Elsevier, vol. 54(C).
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    5. Sumit Saurav & Sobhesh Kumar Agarwalla & Jayanth R. Varma, 2024. "Role of derivatives market in attenuating underreaction to left‐tail risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 484-517, March.
    6. Boermans, Martijn A. & van der Kroft, Bram, 2024. "Capital regulation induced reaching for systematic yield: Financial instability through fire sales," Journal of Banking & Finance, Elsevier, vol. 158(C).

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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