Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk

Marti G. Subrahmanyam (), Dragon Yongjun Tang and Sarah Qian Wang
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Marti G. Subrahmanyam: New York University
Dragon Yongjun Tang: University of Hong Kong
Sarah Qian Wang: University of Warwick

Chapter Chapter 11 in Development in India, 2016, pp 199-236 from Springer

Abstract: Abstract We use credit default swaps (CDS) trading data to demonstrate that the credit risk of reference firms, reflected in rating downgrades and bankruptcies, increases significantly upon the inception of CDS trading, a finding that is robust after controlling for the endogeneity of CDS trading. Additionally, distressed firms are more likely to file for bankruptcy if they are linked to CDS trading. Furthermore, firms with more “no restructuring” contracts than other types of CDS contracts (i.e., contracts that include restructuring) are more adversely affected by CDS trading, and the number of creditors increases after CDS trading begins, exacerbating creditor coordination failure in the resolution of financial distress.

Keywords: Propensity Score; Credit Risk; Credit Default Swap; Financial Distress; Distressed Firm (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isbchp:978-81-322-2541-6_11

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DOI: 10.1007/978-81-322-2541-6_11

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