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We develop a model in which investment risk drives the demand for CDS insurance. We show that CDS overinsurance (insurance in excess of renegotiation proceeds) is procyclical and allows for greater financing of firms with positive NPV projects. In bad times, CDS overinsurance triggers the early liquidation of firms with low continuation values. Our analysis explains the benefits of CDS contracting over economic cycles and reconciles evidence showing that CDSs are most beneficial for firms thatdoi:10.2139/ssrn.1770066 fatcat:lr7rsj4yqnct3jula7cqskque4