The Effect of CDS Trading on Product Market Competition: Evidence from 10-K Filings

Changjie Hu (), Ming Liu and Weiyu Jiang
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Changjie Hu: Holzschuh College of Business Administration, Niagara University, Lewiston, NY 14109, USA
Ming Liu: Sobey School of Business, Saint Mary’s University, Halifax, NS B3H 3C3, Canada
Weiyu Jiang: Desautels Faculty of Management, McGill University, Montreal, QC H3A 1G5, Canada

JRFM, 2023, vol. 16, issue 3, 1-19

Abstract: This paper examines how the initiation of credit default swap (CDS) trading affects the product market competition faced by the referenced firms in the US. The trading of CDS provides an avenue for creditors to hedge default risks, thereby weakening the incentives to monitor the borrowers. Our paper shows that the trading of CDS increases firm-level product market competition because a reduced creditor monitoring effect can lead to growing shareholder demand for information disclosure, revealing strategic information that may undermine the product market competency of the firm when disclosed. While prior literature shows that CDS-traded firms increase both the likelihood and frequency of earnings forecasts as a direct response to shareholder demand, we observe that firms made their mandatory disclosure (i.e., Form 10-K) less readable as a potential way to reduce strategic disclosure. We also find that the presence of institutional investors generally reduces a firm’s competition, but this positive effect is overturned in the presence of CDS trading.

Keywords: credit default swap; product market competition; readability; institutional holding; empty creditors; information disclosure; 10-K filings (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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