The Product Market Effects of Derivatives Trading: Evidence from Credit Default Swaps

Topic:

The Product Market Effects of Derivatives Trading: Evidence from Credit Default Swaps

Time & Date:

10:30am-12:00pm, 2017/10/18

Venue:

Room 502, Daoyuan Building, CUHK(SZ)

Speaker:

Dragon Tang, University of Hong Kong

Detail:

Creditors are less stringent on borrowers’ near-term profitability when they can buy credit protection from the market, freeing borrowers for more aggressive strategies in the product market. We find that, after the inception of credit default swaps (CDS), the reference firms gain product market share as they experience faster sales growth than their non-CDS industry rivals. This CDS effect on industry structure is more pronounced for more opaque and financially constrained sectors. CDS firms gain market share by cutting prices and increasing R&D. Our findings are consistent with the hypothesis that CDS attenuate the agency costs of debt that hinder product market competition and suggest that derivatives trading can affect product market structure.