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The real effects of credit default swaps

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Danis, Andràs and Gamba, Andrea (2018) The real effects of credit default swaps. Journal of Financial Economics, 127 (1). pp. 51-76. doi:10.1016/j.jfineco.2017.10.005 ISSN 0304-405X.

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Official URL: https://doi.org/10.1016/j.jfineco.2017.10.005

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Abstract

We examine the e↵ect of introducing credit default swaps (CDSs) on firm value. Our model allows for dynamic investment and financing, and bondholders can trade in the CDS market. The model incorporates both negative and positive e↵ects of CDSs. CDS markets lead to more liquidations, but they also reduce the probability of costly debt renegotiation, and reduce costly equity financing. After calibrating the model, we find that firm value increases by 2.9% on average with
the introduction of a CDS market. Firms also invest more and increase leverage. The effect on firm value is strongest for small, financially constrained, and lowproductivity firms.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Corporate bonds , Stocks, Liquidation , banktruptcy
Journal or Publication Title: Journal of Financial Economics
Publisher: Elsevier Science BV
ISSN: 0304-405X
Official Date: January 2018
Dates:
DateEvent
January 2018Published
20 October 2017Available
29 November 2016Accepted
Volume: 127
Number: 1
Page Range: pp. 51-76
DOI: 10.1016/j.jfineco.2017.10.005
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Date of first compliant deposit: 8 December 2016
Date of first compliant Open Access: 20 April 2019
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
SG142329British Academyhttp://dx.doi.org/10.13039/501100000286
SG142329Leverhulme Trusthttp://dx.doi.org/10.13039/501100000275

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