The rise of credit default swaps (CDS) provides creditors with a market-based approach to obtaining protection, but it can also affect lenders' monitoring of the borrowers. We find that after CDS begin trading on a given firm, new loans to that firm are less likely to require collateral and have less strict financial covenants, even controlling for endogeneity. The effects are stronger when lenders have easier access to CDS, for safer firms, credit lines, and performance-based covenants. Our evidence is consistent with the theory that the introduction of CDS trading makes loan contracting more effective for better quality borrowers.
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We thank John Core (the editor), Peter Demerjian (JAE conference discussant and referee), Geert Bekaert, Matthew Billett, Michael Brennan, Charles Chang, Qiang Cheng, James Choi, Sudheer Chava, Greg Duffee, Phil Dybvig, Rohan Ganduri, Diego Garcia, Nicolae Garleanu, Vincent Glode, Itay Goldstein, Grace Xing Hu, Sheng Huang, Paul Hsu, Victoria Ivashina, Christopher James, Oguzhan Karakas, Kate Kwan, Jay Li, Kai Li, Ningzhong Li, Si Li, Chen Lin, Tse-Chun Lin, Michelle Lowry, Jeff Ng, Greg Nini, Martin Oehmke, Jiaren Pang, Neil Pearson, Yaxuan Qi, ?QJ? Jun Qian, Michael Roberts, Nikolai Roussanov, Kristian Rydqvist, Joao Santos, Anthony Saunders, Pervin Shroff, Ivan Shaliastovich, Christopher Sims, Wing Suen, Luke Taylor, Sheridan Titman, Cristian Tiu, Hao Wang, Junbo Wang, Sarah Wang, Tan Wang, Xin Wang, Yihui Wang, Jason Chenyang Wei, Toni Whited, Nan Yang, Adam Zawadowski, Liandong Zhang, Zhipeng Zhang, Yingzi Zhu and seminar and conference participants at University of Utah, Chinese University of Hong Kong, Drexel University, University of Florida, Federal Reserve Bank of New York, Wharton School, University of Hong Kong, Shanghai Advanced Institute of Finance, State University of New York ? Binghamton, City University of Hong Kong, Hong Kong Baptist University, Hong Kong Polytechnic University, Peking University (Guanghua and HSBC School), Tsinghua University (PBC School and SEM), Fudan University, University of Glasgow, Institute of Financial Studies at Southwestern University of Finance and Economics, Monash University, Deakin University, Australian National University, Federal Reserve Bank of Richmond, Shanghai University of Finance and Economics, 2015 China International Conference in Finance, 2015 International Corporate Governance Conference at Hong Kong Baptist University, 2015 JLFA International Conference, 2015 SFS Finance Cavalcade, 2015 UT-Austin Alumni Conference, 2016 FIRS Conference, 2018 Journal of Accounting and Economics conference for helpful discussions and useful comments. Dragon Tang acknowledges the support of Hong Kong Research Grants Council (GRF #17510016). Part of the work was done during Chenyu Shan's visit to the Wharton Financial Institutions Center, which was kindly supported by Franklin Allen. This project is supported by the Program for Innovative Research Team of Shanghai University of Finance and Economics (IRTSHUFE).
© 2019 Elsevier B.V.
- Credit default swaps
- Credit protection