This article provides evidence that firm value declines when credit default swaps (CDSs) are initiated and that the effect is greater when CDS trading activity is higher. This decline, which arises from an increase in the cost of capital as opposed to a decrease in free cash flows, traces to a deterioration in the firm’s credit quality and stock liquidity. Firm value declines less when CDS trading is likely to produce incremental information, suggesting that CDS trading has informational benefits for firm value. However, the evidence does not indicate that firm value increases because CDS availability facilitates investments.

Abstract The average maturity of newly issued corporate bonds has declined substantially over the past 40 years, and the traditional determinants of debt maturity fail to explain this decline fully. We show that the changing composition of investors in the corporate bond market influences bond maturities. The results of a Granger causality test, an instrumental variable approach, and a natural experiment suggest that a decline in the insurance companies’ – which prefer long-term bonds – ownership share in the corporate bond market explains a significant part of the unexplained maturity decline. These findings illustrate how investor preferences can have real effects on corporations.