The effect of CDS use on firm value of European Life and Property/Casualty Insurance Companies
Early in the 21st Century there was a rapid increase in the amount of credit default swaps (CDS). Even with this increase in CDS trading, there are mixed findings on the effect of CDS on financial stability. In this line, this study sought to examine the impacts of CDS utilization on the value of a firm. The study used a unique set of data from the Life and Property &Casualty insurance companies in Eurozone Economic Countries on their CDS transactions between the year 2001 and 2009. A two-stage Heckman model was used in adjusting any potential endogeneity of CDS utilisation in connection with firm value. The researcher examined how CDS usage has an impact on the market value of a firm and its performance. Logit regression model was employed in data analysis. The researcher found that there is consistent evidence that use of CDS for the purposes of income generation is related with a lower firm value, both the Life and Property & Casualty insurance companies
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