We examine how the introduction of credit default swap (CDS) trading on the debt of individual firms affects corporate payout policy. We find that firms increase payouts to shareholders after the introduction of CDS trading on their debt. This suggests that CDS-referenced firms determine payout policy in response to decreased creditor monitoring rather than apply more conservative policies to avoid renegotiations with tougher CDS-insured creditors. Moreover, the increase in payouts after CDS introduction is more pronounced in firms with smaller institutional ownership and greater bank debt dependency. Finally, we show that firms tend to repurchase stocks rather than increase dividends when they increase payouts after the introduction of CDS trading.

Keywords: Credit Default Swap; Payout Policy; Creditor Monitoring; Institutional Ownership; Bank Debt Dependency; Dividend; Stock Repurchase.

JEL: G32, G35