Template-Type: ReDIF-Paper 1.0
Title: Clear(ed) Decision: The Effect of Central Clearing on Firms Financing Decision
Author-Name: Maximilian Jager
Author-Email: maximilian.jager@gess.uni-mannheim.de
Author-Name: Frederick Zadow
Author-Email: 
Classification-JEL: G12, G14, G18, G32
Keywords: central clearing, firm capital structure, financial regulation, real effects

Abstract: Does credit derivative market regulation affect corporate finance decisions? 
We investigate this question in the setting of the central counterparty (CCP) clearing reform on
the corporate credit default swap (CDS) market. Exploiting the staggered introduction
of CCP clearing to CDS contracts – an insurance against firm default – we uncover a
shift in the debt composition of firms with adverse real economic consequences. Firms
whose CDS contracts are eligible for clearing with the monopolist CCP lose bond market
funding, but increase their demand for bank loans. Insufficient bank credit supply forces
firms to shrink their balance sheet, cut investment and become less profitable. 
We theoretically motivate two potential channels of effect from clearing firms’ CDS contracts onto
bond demand. The empirical evidence strongly supports an “arbitrage channel”: lower
counterparty risk on the centrally cleared CDS market attracts investors away from the
bond market.


Note: 
Length: 76
Creation-Date: 2023-08
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp445
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_445