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Do credit default swaps impact lenders’ monitoring of loans?

Author

Listed:
  • Naceur Essaddam

    (Royal Military College of Canada)

  • Miran Hossain

    (University of North Carolina)

  • Tashfeen Hussain

    (Mount Royal University)

Abstract

In this paper, we investigate whether lenders alter their degree of monitoring of loans given to a firm after a credit default Swap (CDS) becomes available for the firm. Using a sample of nearly 21,000 loans taken by nearly 4600 non-financial U.S firms over the period of 1996–2014, we find that lenders decrease their degree of monitoring on loans granted to a firm after the inception of the firm’s CDS. The reduction in degree of monitoring is not dependent on whether the lender holds the CDS or not. The availability of the CDS motivates the lenders to decrease the degree of monitoring of loans granted to the firm evidenced by relatively lower degree of comprehensiveness and intensity of both financial and non-financial covenants attached to the post-CDS loans. These findings are robust to loan and firm characteristics, and different measures of covenant comprehensiveness and intensity.

Suggested Citation

  • Naceur Essaddam & Miran Hossain & Tashfeen Hussain, 2023. "Do credit default swaps impact lenders’ monitoring of loans?," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 567-600, August.
    • Handle: RePEc:kap:rqfnac:v:61:y:2023:i:2:d:10.1007_s11156-023-01159-y
    DOI: 10.1007/s11156-023-01159-y
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    More about this item

    Keywords

    Creditor monitoring; Loan covenants; Covenant comprehensives and intensity; Credit default swap;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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