Abstract We find firm cyclicality decreases by 40% after the inception of credit default swap (CDS) trading. The effect stems from CDS firms’ less aggressive asset growth in good times and is stronger for firms facing a more severe empty creditor problem. Important identification issues are addressed. The result cannot be explained with debt overhang, bank lending cyclicality, or the cyclicality of firms’ business fundamentals. It holds for the cyclicality of various corporate outcomes (inventories, cash, and employment). Importantly, CDS trading impedes unhealthy growth and enhances profitability and firm value. Our finding indicates an important positive real effect of financial innovation.

This paper examines an unintended response to the one-child policy in China: births of twins. Analysis of population census data shows that the one-child policy has accounted for more than one-third of the increase in the reported births of twins since the 1970s. Investigation using birth spacing with prior births and height difference within twins suggests that the increase in the birth of twins is partly due to parents reporting regularly spaced children as twins to avoid the policy violation punishment. The study highlights the possibility of individual behavioral response to undesirable government policies and the potential social consequences.