Hung-Gay Fung is the Dr. Y. S. Professor of Chinese Studies in the College of Business Administration & Center of International Studies at the University of Missouri-St. Louis in St. Louis, MO. Min-Ming Wen is an Assistant Professor in the College of Business and Economics at California State University, Los Angeles in Los Angeles, CA. Gaiyan Zhang is a Finance Board Scholar and an Associate Professor in the College of Business Administration at the University of Missouri-St. Louis in St. Louis, MO.
How Does the Use of Credit Default Swaps Affect Firm Risk and Value? Evidence from US Life and Property/Casualty Insurance Companies
Article first published online: 13 SEP 2012
© 2012 Financial Management Association International.
Volume 41, Issue 4, pages 979–1007, Winter 2012
How to Cite
Fung, H.-G., Wen, M.-M. and Zhang, G. (2012), How Does the Use of Credit Default Swaps Affect Firm Risk and Value? Evidence from US Life and Property/Casualty Insurance Companies. Financial Management, 41: 979–1007. doi: 10.1111/j.1755-053X.2012.01203.x
We thank two anonymous reviewers and Bill Christie (Editor) for helpful comments. Fung and Zhang acknowledge the financial support of summer research grants from the College of Business Administration and the Center for International Studies, University of Missouri-St. Louis. We also thank comments from the seminar participants of the 2011 FMA conference.
- Issue published online: 27 NOV 2012
- Article first published online: 13 SEP 2012
This study uses a unique credit default swap (CDS) transaction data set of insurers to examine the effects of CDS usage on the risk profile and firm value of US insurance companies for the period 2001-2009. Applying a Heckman two-stage model to adjust for the potential endogeneity of CDS usage with respect to firm risk and firm value, we find consistent evidence that the utilization of CDS for income generation purposes is associated with greater market risk, deterioration of financial performance, and lower firm value, for both Life and Property/Casualty insurers.