Can credit default swaps exert an enduring monitoring influence on political integrity?

Hsien-Yi Chen () and Sheng-Syan Chen ()
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Hsien-Yi Chen: Providence University
Sheng-Syan Chen: National Taiwan University

Review of Quantitative Finance and Accounting, 2023, vol. 60, issue 2, No 2, 445-469

Abstract: Abstract Exploiting the launch of U.S. state credit default swaps (CDS) to study how financial market monitoring affects local political integrity, we show that CDS-referenced states are associated with reduced corruption conviction rates of local government officials by about 28% post-launch compared to non-CDS-referenced states. The effect on curbing corruption persists up to six years after CDS issuance. Improved transparency of government fiscal information is the primary mechanism through which CDS inception affects corruption. We conclude that credit market innovation creates positive and enduring externalities for political integrity.

Keywords: Credit default swaps; Public corruption; Government information transparency (search for similar items in EconPapers)
JEL-codes: D72 D73 G14 G20 K42 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-022-01100-9

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