Credit Default Swaps and Debt Overhang
| Autor: | Tak-Yuen Wong, Jin Yu |
|---|---|
| Rok vydání: | 2022 |
| Předmět: |
050208 finance
Credit default swap media_common.quotation_subject Strategy and Management Enterprise value 05 social sciences Financial system Debt financing Monetary economics Management Science and Operations Research Investment (macroeconomics) Credit default swap index Debt overhang iTraxx Debt 0502 economics and business Economics Credit derivative Business 050207 economics media_common Valuation (finance) Credit risk |
| Zdroj: | Management Science. 68:2069-2097 |
| ISSN: | 1526-5501 0025-1909 |
| DOI: | 10.1287/mnsc.2020.3953 |
| Popis: | We analyze the impact of credit default swaps (CDSs) trading on firm investment, long-term debt financing, and valuation. In our model, the firm is endowed with a real option to initiate a project and enhance its future growth. Its creditors have access to CDS contracts that hedge them against default losses. We show that CDS protection increases the firm’s pledgable income: that is, the maximum amount of debt it can raise. However, at the same time CDS protection decreases asset growth and impedes project initiation. As a result, CDS trading could reduce firm value, and the negative effects are stronger when the firm is riskier, where shareholders have stronger bargaining power, and growth opportunities are less valuable. Using simulated cross-sections of firms, we find that CDS trading increases corporate default rates and deters investment. Altogether, CDS firms tend to have a lower firm value and more volatile equity returns than non-CDS firms. This paper was accepted by Gustavo Manso, finance. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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