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Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

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  • András Danis

    (Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308)

Abstract

In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006–2011, I show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its debt. To address endogeneity concerns, I use the introduction of the Big Bang Protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out of court. This is important because it can increase the likelihood of future bankruptcy, which is inefficient. The findings are consistent with the empty creditor hypothesis, which posits that bondholders who are hedged with CDSs are less likely to participate in a debt restructuring. The paper also contains direct evidence for the existence of empty creditors.

Suggested Citation

  • András Danis, 2017. "Do Empty Creditors Matter? Evidence from Distressed Exchange Offers," Management Science, INFORMS, vol. 63(5), pages 1285-1301, May.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:5:p:1285-1301
    DOI: 10.1287/mnsc.2015.2375
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    3. Demiroglu, Cem & James, Christopher, 2015. "Bank loans and troubled debt restructurings," Journal of Financial Economics, Elsevier, vol. 118(1), pages 192-210.
    4. Wang, Xinjie & Wu, Yangru & Yan, Hongjun & Zhong, Zhaodong (Ken), 2021. "Funding liquidity shocks in a quasi-experiment: Evidence from the CDS Big Bang," Journal of Financial Economics, Elsevier, vol. 139(2), pages 545-560.
    5. Li, Jay Y. & Tang, Dragon Yongjun, 2022. "Product market competition with CDS," Journal of Corporate Finance, Elsevier, vol. 73(C).
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    7. Clark, Brian & Donato, James & Francis, Bill B., 2023. "Credit default swaps and debt specialization," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    8. Tak-Yuen Wong & Jin Yu, 2022. "Credit Default Swaps and Debt Overhang," Management Science, INFORMS, vol. 68(3), pages 2069-2097, March.
    9. Wayne R. Landsman & Chao Kevin Li & Jianxin Donny Zhao, 2023. "CDS Trading Initiation, Information Asymmetry, and Dividend Payout," Management Science, INFORMS, vol. 69(1), pages 684-701, January.
    10. Rajesh Narayanan & Cihan Uzmanoglu, 2018. "Credit Insurance, Distress Resolution Costs, and Bond Spreads," Financial Management, Financial Management Association International, vol. 47(4), pages 931-951, December.
    11. Hellen W. Wanyoike & Samuel O. Onyuma & James N. Kung’u, 2021. "Working capital management practices and operational performance of selected supermarkets with national network," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(2), pages 72-85, March.
    12. Hai Lin & Binh Hoang Nguyen & Junbo Wang & Cheng Zhang, 2023. "Credit default swaps and firm risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1668-1692, November.

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    More about this item

    Keywords

    credit default swaps; CDS; empty creditor; restructuring; bankruptcy;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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