Investment Risk, CDS Insurance, and Firm Financing

24 Pages Posted: 28 Feb 2011 Last revised: 12 Mar 2020

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Date Written: December 18, 2018

Abstract

We develop a model in which investment risk drives the demand for CDS insurance. The model shows the efficiency of CDS contracting over the state of the economy. It shows that CDS overinsurance (insurance in excess of renegotiation surpluses) is procyclical, allowing for greater financing when the probability of default is lower. Our theory predicts that the incidence of so-called ``empty creditors'' is largely constrained to firms that are safer, face lower bankruptcy costs, have more severe management-creditor agency problems, and whose assets are costlier to verify. Our analysis generates a number of empirical predictions and provides new insights into the regulation of CDS markets.

Keywords: CDS, Empty Creditors, Bankruptcy, Financing Efficiency, Regulation

JEL Classification: G33, D86, D61

Suggested Citation

Campello, Murillo and Matta, Rafael, Investment Risk, CDS Insurance, and Firm Financing (December 18, 2018). European Economic Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1770066 or http://dx.doi.org/10.2139/ssrn.1770066

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Rafael Matta (Contact Author)

SKEMA Business School - Université Côte d'Azur ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

HOME PAGE: http://https://sites.google.com/site/almeidadamatta/

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