Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps

Alexander Butler, Xiang Gao () and Cihan Uzmanoglu ()
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Xiang Gao: University of North Dakota, Grand Forks, North Dakota 58203
Cihan Uzmanoglu: Binghamton University, Binghamton, New York 13902

Management Science, 2021, vol. 67, issue 5, 3150-3173

Abstract: We study the influence of credit default swaps (CDS) trading on the costs of bond intermediation. After CDS initiation, CDS firms pay 12% to 28% (8 to 20 basis points) lower underwriting fees than similar non-CDS firms do. Underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable. In bond offerings, participation by investors facing risk-based regulatory requirements increases after CDS initiation. Our evidence suggests that CDS-driven innovations in risk sharing contribute to the transactional efficiency of the market by reducing the financial intermediation costs of placing bonds.

Keywords: credit default swaps; underwriting fees; bond ownership; hedging credit risk (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:5:p:3150-3173

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