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Credit Default Swaps and Firm Value

Published online by Cambridge University Press:  02 April 2018

Rajesh Narayanan  and
Cihan Uzmanoglu
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Abstract

This article provides evidence that firm value declines when credit default swaps (CDSs) are initiated and that the effect is greater when CDS trading activity is higher. This decline, which arises from an increase in the cost of capital as opposed to a decrease in free cash flows, traces to a deterioration in the firm’s credit quality and stock liquidity. Firm value declines less when CDS trading is likely to produce incremental information, suggesting that CDS trading has informational benefits for firm value. However, the evidence does not indicate that firm value increases because CDS availability facilitates investments.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 3 , June 2018 , pp. 1227 - 1259
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Murillo Campello, Jennifer Conrad (the editor), Emre Demirezen, Rory Eckardt, Oleg Gredil, Umit Gurun, Hyoseok Hwang, Murali Jagannathan, Chanatip Kitwiwattanachai, Tomislav Ladika, Andrew Lynch, Kristian Rydqvist, Sabatino Silveri, Musa Subasi, Dragon Tang (the referee), and participants at the 2015 Financial Management Association Meeting for helpful comments and Xiang Gao and Rong Guo for excellent research assistance.

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