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      The Effect of CDS Trading on Product Market Competition: Evidence from 10-K Filings

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      Journal of Risk and Financial Management
      MDPI AG

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          Abstract

          This paper examines how the initiation of credit default swap (CDS) trading affects the product market competition faced by the referenced firms in the US. The trading of CDS provides an avenue for creditors to hedge default risks, thereby weakening the incentives to monitor the borrowers. Our paper shows that the trading of CDS increases firm-level product market competition because a reduced creditor monitoring effect can lead to growing shareholder demand for information disclosure, revealing strategic information that may undermine the product market competency of the firm when disclosed. While prior literature shows that CDS-traded firms increase both the likelihood and frequency of earnings forecasts as a direct response to shareholder demand, we observe that firms made their mandatory disclosure (i.e., Form 10-K) less readable as a potential way to reduce strategic disclosure. We also find that the presence of institutional investors generally reduces a firm’s competition, but this positive effect is overturned in the presence of CDS trading.

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          Most cited references43

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          The economic implications of corporate financial reporting

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            Enjoying the Quiet Life? Corporate Governance and Managerial Preferences

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              When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10-Ks

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                Author and article information

                Contributors
                Journal
                Journal of Risk and Financial Management
                JRFM
                MDPI AG
                1911-8074
                March 2023
                March 22 2023
                : 16
                : 3
                : 207
                Article
                10.3390/jrfm16030207
                e12402d0-5efc-4c34-88e8-67243b11df2b
                © 2023

                https://creativecommons.org/licenses/by/4.0/

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