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Dark Knights: The Rise in Firm Intervention by Credit Default Swap Investors

Author

Listed:
  • András Danis

    (Department of Economics and Business, Central European University, 1100 Vienna, Austria; Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308)

  • Andrea Gamba

    (Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom)

Abstract

There have been several cases in recent years where credit default swap (CDS) buyers and sellers intervene in the restructuring of a distressed firm. We show theoretically that this can increase firm value. Intervention by CDS buyers solves the commitment problem between equity and debt holders but increases the probability of inefficient liquidation. Intervention by CDS sellers reduces the issue of excessive liquidation while keeping the benefits of CDS buyer intervention. Having both types of intervention decouples the commitment problem from the liquidation problem. Under certain assumptions, the so-called empty creditor problem can be solved, and firm value reaches first best.

Suggested Citation

  • András Danis & Andrea Gamba, 2024. "Dark Knights: The Rise in Firm Intervention by Credit Default Swap Investors," Management Science, INFORMS, vol. 70(2), pages 952-970, February.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:2:p:952-970
    DOI: 10.1287/mnsc.2023.4717
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