Credit Default Swaps and the Cost of Capital

2020 ◽  
Author(s):  
Harjeet Bhabra ◽  
Pascal Francois ◽  
Thomas John Walker ◽  
Chunrong Wang
Keyword(s):  
Cost Of Capital ◽  
Credit Default Swaps ◽  
Credit Default ◽  
The Cost

scholarly journals Credit Market Speculation and the Cost of Capital

2014 ◽  
Vol 6 (4) ◽  
pp. 1-34 ◽  
Author(s):  
Yeon-Koo Che ◽  
Rajiv Sethi
Keyword(s):  
Multiple Equilibria ◽  
Cost Of Capital ◽  
Credit Derivatives ◽  
Credit Market ◽  
Credit Default Swaps ◽  
Cost Of Debt ◽  
Insurable Interest ◽  
Rollover Risk ◽  
Credit Default ◽  
The Cost

We examine the effects of speculation using credit derivatives on the cost of debt and the likelihood of default. The availability of credit default swaps induces investors who are optimistic about borrower revenues to sell protection instead of buying bonds. This benefits borrowers if protection can only be bought with an insurable interest, but can increase the cost of debt and crowd out productive lending if protection can be purchased as a bet on default. We also show that the possibility of speculation on default may cause multiple equilibria and exacerbate the problem of rollover risk. (JEL D86, G13, G31)

Credit Default Swaps and Firm Value

2018 ◽  
Vol 53 (3) ◽  
pp. 1227-1259 ◽  
Author(s):  
Rajesh Narayanan ◽  
Cihan Uzmanoglu
Keyword(s):  
Firm Value ◽  
Cost Of Capital ◽  
Credit Default Swaps ◽  
Cash Flows ◽  
Stock Liquidity ◽  
Credit Quality ◽  
Credit Default ◽  
Incremental Information ◽  
The Cost ◽  
Free Cash Flows

This article provides evidence that firm value declines when credit default swaps (CDSs) are initiated and that the effect is greater when CDS trading activity is higher. This decline, which arises from an increase in the cost of capital as opposed to a decrease in free cash flows, traces to a deterioration in the firm’s credit quality and stock liquidity. Firm value declines less when CDS trading is likely to produce incremental information, suggesting that CDS trading has informational benefits for firm value. However, the evidence does not indicate that firm value increases because CDS availability facilitates investments.

An Introduction to the Cost of Capital

2010 ◽  
Author(s):  
Ignacio Velez-Pareja ◽  
Joseph Tham
Keyword(s):  
Cost Of Capital ◽  
The Cost
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