The effects of credit default swaps on corporate investment |
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| Authors: | Jieying Hong Na Wang |
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| Institution: | 1. School of Economics and Management, Beihang University, Beijing, People's Republic of China;2. ESSEC Business School, Singapore, Singapore hong@buaa.edu.cn;4. Frank G. Zarb School of Business, Hofstra University, Hempstead, NY, USA |
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| Abstract: | ABSTRACT This paper examines how credit default swaps (CDS) affect the corporate investment of the referenced entities. We document a significant reduction in corporate investment after CDS trading, a result that is robust to alternative model specifications and a set of endogeneity tests. Our findings of the increased firm risk and cost of capital support the costly external capital channel. The cross-sectional variations in CDS effects demonstrate that both reduced monitoring and the empty creditor problem might be the underlying forces driving the costly external capital channel. Our additional analysis implies that CDS trading is associated with an enhancement in investment efficiency for firms that are prone to overinvestment. |
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| Keywords: | Credit default swaps corporate investment bank monitoring empty creditor costly external capital |
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