Impact of Credit Default Swaps on Firms' Operational Efficiency

Liangfei Qiu, Ruiqi Liu (Corresponding Author), Yong Jin (Corresponding Author), Chao Ding, Yangyang Fan, Andy C.L. Yeung

Research output: Journal article publicationJournal articleAcademic researchpeer-review

Abstract

As one of the most important financial innovations in the last two decades, credit default swap (CDS) contracts have been initiated and actively traded in the market to hedge against credit risks. However, little is known about how these financial innovations affect an underlying firm’s operations. In this empirical study, we find that an underlying firm’s operational efficiency is significantly improved with the inception of CDS trading. Our results are robust to multiple causal identification strategies. Further analysis suggests that the inception of CDS tends to enhance the operational efficiency of a firm through the supply chain financing capability and trade credit. We also postulate that CDS leads to enhanced efficiency through institutional monitoring and improvements in management effectiveness. We then obtain suggestive evidence. Our findings have direct implications concerning the ongoing policy debate surrounding CDS. We contribute to operations management research by exploring how innovations in the financial market would, in turn, affect the operational performance of firms.
Original languageEnglish
JournalProduction and Operations Management
Publication statusAccepted/In press - 27 May 2022

Keywords

  • Financial Innovations
  • Credit Default Swaps
  • Operational Efficiency
  • Supply Chain Finance
  • Institutional Monitoring

Cite this