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Does the tail wag the dog? : the effect of credit default swaps on credit risk
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Subrahmanyam, Marti G., Tang, Dragon Yongjun and Wang, Sarah Qian (2014) Does the tail wag the dog? : the effect of credit default swaps on credit risk. Review of Financial Studies, 27 (10). pp. 2927-2960. doi:10.1093/rfs/hhu038 ISSN 0893-9454.
An open access version can be found in:
Official URL: http://dx.doi.org/10.1093/rfs/hhu038
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.
| Item Type: | Journal Article | ||||
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Journal or Publication Title: | Review of Financial Studies | ||||
| ISSN: | 0893-9454 | ||||
| Official Date: | 2014 | ||||
| Dates: |
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| Volume: | 27 | ||||
| Number: | 10 | ||||
| Page Range: | pp. 2927-2960 | ||||
| DOI: | 10.1093/rfs/hhu038 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Restricted or Subscription Access | ||||
| Related URLs: | |||||
| Open Access Version: |
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