Salil Gadgil

Working Papers

Do Credit Default Swaps Still Lead? The Effects of Regulation on Price Discovery (job market paper)

We investigate how price discovery in the credit default swap (CDS) market has been impacted by regulation implemented since the Global Financial Crisis. We find that single-name CDS spreads impound less private information prior to rating downgrades and adjust more slowly after downgrades are announced. We also show that CDS spreads lead corporate bond spreads less strongly following the adoption of stringent margin requirements that apply only to derivatives. This decline is sharpest for reference entities that are most exposed to the new rules. Price discovery appears to be unharmed for CDS indices, which are largely centrally cleared and, thus, less affected by many of the reforms. We rationalize the findings with a model in which increased transaction costs for single names drive informed agents to trade indices. Together, the results highlight a lesser-studied channel through which post-crisis regulation has influenced financial markets.

Counterparty Risk and Counterparty Choice in the Credit Default Swap Market, with Wenxin Du, Michael Gordy, and Clara Vega

We investigate how market participants price and manage counterparty credit risk in the post-2008 global financial crisis period using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is low. Our results suggest that credit rationing may arise under wider circumstances than previously recognized.

Caught in the Act: How Corporate Scandals Hurt Employees, with Jason Sockin

Using a sample of corporate scandals and data from the website Glassdoor, we study how negative reputation shocks affect the relationship between firms and their employees. Worker sentiment declines sharply and persistently following scandals, driven by diminished perceptions of management and culture. While base earnings and fringe benefits remain unchanged, variable compensation falls six percent, with less-experienced workers bearing the largest reductions. Consistent with the decreases in job satisfaction and compensation, we find that average labor productivity drops and that firms may face more difficulty filling job vacancies. Our results demonstrate that rank-and-file employees are adversely impacted by corporate misconduct.