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Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading

Author

Listed:
  • Stefano Colonnello

    (Otto-von-Guericke Universität Magdeburg; Halle Institute for Economic Research)

  • Matthias Efing

    (Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute; CESifo (Center for Economic Studies and Ifo Institute for Economic Research))

  • Francesca Zucchi

    (Federal Reserve Board)

Abstract

Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of such debt unbundling crucially hinge on shareholder bargaining power. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiations. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders drop by 7.9%, 7%, and 8.8% compared to other firms.

Suggested Citation

  • Stefano Colonnello & Matthias Efing & Francesca Zucchi, 2016. "Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading," Swiss Finance Institute Research Paper Series 16-17, Swiss Finance Institute, revised Jun 2016.
    • Handle: RePEc:chf:rpseri:rp1617
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    Cited by:

    1. Colonnello, Stefano, 2017. "Internal governance and creditor governance: Evidence from credit default swaps," IWH Discussion Papers 6/2017, Halle Institute for Economic Research (IWH).

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    JEL classification:

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