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Credit default swaps, exacting creditors and corporate liquidity management

Author

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  • Subrahmanyam, Marti G.
  • Tang, Dragon Yongjun
  • Wang, Sarah Qian

Abstract

We investigate the liquidity management of firms following the inception of credit default swaps (CDS) markets on their debt, which allow hedging and speculative trading on credit risk to be carried out by creditors and other parties. We find that reference firms hold more cash after CDS trading commences on their debt. The increase in cash holdings is more pronounced for CDS firms that do not pay dividends and have a higher marginal value of liquidity. For CDS firms with higher cash flow volatility, these increased cash holdings do not entail higher leverage. Overall, our findings are consistent with the view that CDS-referenced firms adopt more conservative liquidity policies to avoid negotiations with more exacting creditors.

Suggested Citation

  • Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2017. "Credit default swaps, exacting creditors and corporate liquidity management," Journal of Financial Economics, Elsevier, vol. 124(2), pages 395-414.
    • Handle: RePEc:eee:jfinec:v:124:y:2017:i:2:p:395-414
    DOI: 10.1016/j.jfineco.2017.02.001
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    More about this item

    Keywords

    Credit default swaps; Cash; Liquidity; Empty creditors;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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