Clear(ed) Decision: The Effect of Central Clearing on Firms Financing Decision

Maximilian Jager () and Frederick Zadow

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Does credit derivative market regulation affect corporate finance decisions? We investigate this question in the setting of the central counterparty (CCP) clearing reform on the corporate credit default swap (CDS) market. Exploiting the staggered introduction of CCP clearing to CDS contracts – an insurance against firm default – we uncover a shift in the debt composition of firms with adverse real economic consequences. Firms whose CDS contracts are eligible for clearing with the monopolist CCP lose bond market funding, but increase their demand for bank loans. Insufficient bank credit supply forces firms to shrink their balance sheet, cut investment and become less profitable. We theoretically motivate two potential channels of effect from clearing firms’ CDS contracts onto bond demand. The empirical evidence strongly supports an “arbitrage channel”: lower counterparty risk on the centrally cleared CDS market attracts investors away from the bond market.

Keywords: central clearing; firm capital structure; financial regulation; real effects (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 G32 (search for similar items in EconPapers)
Pages: 76
Date: 2023-08
New Economics Papers: this item is included in nep-cfn
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