Relationship between CDS market and capital structure of the reference entities

Credit default swaps have gotten quite extensive academic focus after the financial crisis, since many researchers and practitioners saw those being one of the main reasons for the crisis. Some articles have tried to analyze whether CDS market increases or decreases the overall stability of the financial market, but the results are mixed. Many studies have also tried to understand the connection between CDS, bond and equity market, but the results are fairly mixed on that field too. However, quite little focus has been put on the effect that CDS market might have towards the fundamentals on the underlying companies. This thesis tries to fill this research gap by analyzing if the onset of CDS trading gives reference entities better access to credit and therefore affects their balance sheet and income statement ratios. The dataset used in the empirical part is gathered from Thomson Reuters Datastream and Bloomberg and consists of all the non-financial and non-sovereign CDS contracts from Thomson Reuters Datastream for the years of 2007–2015. Dataset also includes various income statement, balance sheet and rating figures for the underlying companies in the CDS contracts. Panel data regressions are used to analyze if the onset of CDS trading has had an effect on the reference entities’ debt to assets ratios or interest rate expenses and controlling for other known factors affecting the same ratios. Results are mixed, but well in line with the few previous studies that have done for similar subjects. Debt to assets ratios are increasing during the two years after the CDS inception by around 6%–7% of the mean debt to assets ratio, depending on the specified model. The effect is the strongest on the first years following the inception. For the second investigated variable, interest expenses on debt, no relationship was found contrary to some other similar studies. Results suggest that companies having protection available against their credit risk have better access to credit and therefore higher debt to assets ratios. However, their interest rate expenses are not affected by the same matter, which could be due to opposite effects arising from empty creditor problem.siirretty Doriast