Credit default swaps and firm cyclicality

Lars Norden; Chao Yin; Lei Zhao

doi:10.1017/S0022109023001291

Credit default swaps and firm cyclicality

Lars Norden^*, Chao Yin, Lei Zhao

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract / Description of output

We find firm cyclicality decreases by 40% after the inception of credit default swap (CDS) trading. The effect stems from CDS firms’ less aggressive asset growth in good times and is stronger for firms facing a more severe empty creditor problem. Important identification issues are addressed. The result cannot be explained with debt overhang, bank lending cyclicality or the cyclicality of firms’ business fundamentals. It holds for the cyclicality of various corporate outcomes (inventories, cash and employment). Importantly, CDS trading impedes unhealthy growth and enhances profitability and firm value. Our finding indicates an important positive real effect of financial innovation.

Original language	English
Journal	Journal of Financial and Quantitative Analysis
Early online date	31 Oct 2023
DOIs	https://doi.org/10.1017/S0022109023001291
Publication status	E-pub ahead of print - 31 Oct 2023

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NordenEtal2023JFQACreditDefaultSwapsAccepted author manuscript, 613 KBLicence: Creative Commons: Attribution (CC-BY)

Cite this

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title = "Credit default swaps and firm cyclicality",

abstract = "We find firm cyclicality decreases by 40% after the inception of credit default swap (CDS) trading. The effect stems from CDS firms{\textquoteright} less aggressive asset growth in good times and is stronger for firms facing a more severe empty creditor problem. Important identification issues are addressed. The result cannot be explained with debt overhang, bank lending cyclicality or the cyclicality of firms{\textquoteright} business fundamentals. It holds for the cyclicality of various corporate outcomes (inventories, cash and employment). Importantly, CDS trading impedes unhealthy growth and enhances profitability and firm value. Our finding indicates an important positive real effect of financial innovation.",

author = "Lars Norden and Chao Yin and Lei Zhao",

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AU - Zhao, Lei

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N2 - We find firm cyclicality decreases by 40% after the inception of credit default swap (CDS) trading. The effect stems from CDS firms’ less aggressive asset growth in good times and is stronger for firms facing a more severe empty creditor problem. Important identification issues are addressed. The result cannot be explained with debt overhang, bank lending cyclicality or the cyclicality of firms’ business fundamentals. It holds for the cyclicality of various corporate outcomes (inventories, cash and employment). Importantly, CDS trading impedes unhealthy growth and enhances profitability and firm value. Our finding indicates an important positive real effect of financial innovation.

AB - We find firm cyclicality decreases by 40% after the inception of credit default swap (CDS) trading. The effect stems from CDS firms’ less aggressive asset growth in good times and is stronger for firms facing a more severe empty creditor problem. Important identification issues are addressed. The result cannot be explained with debt overhang, bank lending cyclicality or the cyclicality of firms’ business fundamentals. It holds for the cyclicality of various corporate outcomes (inventories, cash and employment). Importantly, CDS trading impedes unhealthy growth and enhances profitability and firm value. Our finding indicates an important positive real effect of financial innovation.

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DO - 10.1017/S0022109023001291

M3 - Article

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JO - Journal of Financial and Quantitative Analysis

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Credit default swaps and firm cyclicality

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