The Interdependence of Debt and Innovation Sustainability: Evidence from the Onset of Credit Default Swaps

Yixin Chen and Junrui Zhang
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Yixin Chen: Department of Accounting and Finance, School of Management, Xi’an Jiaotong University, Xi’an 710049, China
Junrui Zhang: Department of Accounting and Finance, School of Management, Xi’an Jiaotong University, Xi’an 710049, China

Sustainability, 2019, vol. 11, issue 10, 1-24

Abstract: Innovation sustainability requires sustainable financing. Extensive research suggests that debt is a disfavored source of innovation financing. In this study, we show that a recent financial development, credit default swaps (CDSs), may change the institutional logics of debt, making debt useful to the financing innovation. To be specific, we find that with CDS protection, creditors become less concerned with a borrowing firm’s credit risk and risk taking, making debt tolerant of early failures and reducing the negative impact of debt on the process of Innovation. In addition, we find that the availability of CDSs is more likely to change the nature of long-term debt than that of short-term debt, making long-term debt a useful instrument for the financing of innovation. Finally, the mitigation effect of CDS on the relation between debt and innovation is more pronounced for CDS firms with higher pay sensitivity to stock price volatility ( Vega ) and less financial constraints, revealing that a CEO’s incentive, rather than the relaxed financing constraints, is the underlying channel for the reduced negative impact of debt on innovation after CDS trading.

Keywords: R&D intensity; innovation; credit default swaps; debt financing; sustainability (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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