Abstract: This paper provides the first empirical evidence on the externalities of credit default swaps (CDS). We find that firm leverage is lower when a larger proportion of its revenue derives from customers referenced by CDS. This leverage externality of CDS is stronger when the customer-supplier relationship is longer, when the customer credit quality is lower, or when suppliers have fewer growth opportunities. Such evidence is consistent with firms perceiving customer CDS as foreboding potential risks from the supply chain. Therefore, while many firms are not directly linked to CDS, CDS on their customers have spillover effects on their financial policies.