Credit default swaps and firm risk

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Abstract

This study investigates how initiating a credit default swap (CDS) affects firm risk. Using the firm value volatility as a measure of firm risk, we document that firm risk decreases following the commencement of CDS trading. Further analysis indicates that the empty creditor channel, which arises when a debt holder with CDS protection has no interest in preserving the company it provides funds, is the primary way of influence. Our findings reveal a significant impact of financial innovation on a firm's behavior. We also document that market frictions affect the degree of such effect.

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APA

Lin, H., Nguyen, B. H., Wang, J., & Zhang, C. (2023). Credit default swaps and firm risk. Journal of Futures Markets, 43(11), 1668–1692. https://doi.org/10.1002/fut.22452

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