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.
|Number of pages||21|
|Journal||Production and Operations Management|
|Early online date||26 Jun 2022|
|Publication status||Published (in print/issue) - 30 Sep 2022|
Bibliographical noteFunding Information:
The authors thank the department editor, the senior editor, and three anonymous reviewers for their valuable suggestions that have significantly improved this study. The work described in this paper was substantially supported by the funding for Projects of Strategic Importance of The Hong Kong Polytechnic University (Project Code: 1‐ZE2D). Ruiqi Liu and Yong Jin acknowledge the support from the Center for Economic Sustainability and Entrepreneurial Finance (CESEF), PolyU AF. Yangyang Fan acknowledges the General Research Fund from the Research Grants Council of Hong Kong (Project No. 15508219). Andy Yeung was supported in part by PolyU's research fund 99QP. Ruiqi Liu and Yong Jin are the corresponding authors of the article.
© 2022 Production and Operations Management Society.
- Financial Innovations
- Credit Default Swaps
- operational efficiency
- Supply Chain Finance
- Institutional Monitoring