FRIC/Finance Seminar with Marti Subrahmanyam, NYU Stern

FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Marti Subrahmanyam, New York University.

Marti Subrahmanyam will present: 

Credit default swaps around the world: Investment and financing effects

Authors
Söhnke M. Bartram, Warwick Business School
Jennifer Conrad, Kenan-Flagler Business School, University of North Carolina  
Jongsub Lee, Warrington College of Business University of Florida  
Marti G. Subrahmanyam, Stern School of Business, New York University

ABSTRACT
We analyze the impact of CDS introduction on real decision-making within the firm, taking into account differences in the local economic and legal environment of firms. We extend the model of Bolton and Oehmke (2011) in order to consider uncertainty in whether actions taken by the reference entity will trigger CDS obligations. We test the predictions of the model in a sample of more than 56,000 firms across 50 countries over the period 2001-2015. We find substantial evidence that the introduction of CDS affects real decisions within the firm, including leverage, investment, and the risk of the investments taken by the firm. Importantly, we find that the legal and market environment in which the reference entity operates has an influence on the impact of CDS. The effect of CDS is larger where uncertainty regarding their obligations is reduced, and where they mitigate weak property rights. We also find that CDS are more likely to be introduced on firms that are headquartered in countries with weaker creditor rights, a stronger orientation toward bank financing, and lower levels of ownership concentration.