Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk

  • Marti G. Subrahmanyam
  • Dragon Yongjun Tang
  • Sarah Qian Wang
Part of the India Studies in Business and Economics book series (ISBE)


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.


Propensity Score Credit Risk Credit Default Swap Financial Distress Distressed Firm 
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For their helpful comments on previous drafts of this paper, we thank Michael Weisbach (the editor of RFS), two anonymous referees, Viral Acharya, Edward Altman, Yakov Amihud, Sreedhar Bharath, Ekkehart Boehmer, Patrick Bolton, Dion Bongaerts, Stephen Brown, Jennifer Carpenter, Sudheer Chava, Peter DeMarzo, Mathijs van Dijk, Jin-Chuan Duan, Darrell Duffie, Alessandro Fontana, Andras Fulop, Iftekhar Hasan, Jean Helwege, Jingzhi Huang, Kose John, Stanley Kon, Lars-Alexander Kuehn, Anh Le, Jingyuan Li, Kai Li, Francis Longstaff, Ron Masulis, Robert McDonald, Lars Norden, Martin Oehmke, Frank Packer, Stylianos Perrakis, Xiaoling Pu, Talis Putnins, Anthony Saunders, Lukas Schmid, Ilhyock Shim, Marakani Srikant, Erik Stafford, Rene M. Stulz, Avanidhar Subrahmanyam, Heather Tookes, Hao Wang, Neng Wang, Wei Wang, John Wei, Andrew Winton, Pengfei Ye, David Yermack, Fan Yu, Gaiyan Zhang, Xinlei Zhao, Hao Zhou, Haibin Zhu, and the seminar and conference participants at CEMFI, Madrid, Cheung Kong Graduate School of Business, Beijing, City University of Hong Kong, European Central Bank, Erasmus University, Rotterdam, Hong Kong Institute for Monetary Research, Lingnan University, Hong Kong, Nanyang Technological University, National University of Singapore, NYU Stern School of Business, U.S. Office of the Comptroller of the Currency (OCC), Ozyegin University, PRMIA (Webinar), Rouen Business School, Singapore Management University, Standard & Poor’s, Southwestern University of Finance and Economics, Chengdu, Tsinghua University, Beijing, University of Bristol, University of Hong Kong, University of New South Wales, University of Nottingham, Ningbo, University of the Thai Chamber of Commerce, Warwick Business School, Xiamen University, the 2014 AFA meetings, the 2013 American Economic Association (AEA) Annual Meetings, the 2012 European Finance Association Meetings, the 2012 China International Conference in Finance, the 2012 Risk Management Institute conference at NUS, the 2012 UBC Winter Finance Conference, the 2012 FMA Napa Conference, the 2012 Conference of the Paul Woolley Centre for Capital Market Dysfunctionality at UTS, the 2012 Multinational Finance Society Meetings, the 2012 International Risk Management Conference, the 2012 SFM Conference at National Sun Yat-sen University, and the 2011 Financial Management Association meetings in Denver. Dragon Tang acknowledges the support and hospitality of the Hong Kong Institute for Monetary Research (HKIMR), as part of the work was conducted when he was a HKIMR visiting research fellow.

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Copyright information

© Springer India 2016

Authors and Affiliations

  • Marti G. Subrahmanyam
    • 1
  • Dragon Yongjun Tang
    • 2
  • Sarah Qian Wang
    • 3
  1. 1.Stern School of BusinessNew York UniversityNew YorkUSA
  2. 2.Faculty of Business and EconomicsUniversity of Hong KongPokfulamHong Kong
  3. 3.Warwick Business SchoolUniversity of WarwickCoventryUK

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