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

Stefano Colonnello, Matthias Efing and Francesca Zucchi
Additional contact information
Francesca Zucchi: Federal Reserve Board

No 16-17, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Debt Decoupling; Empty Creditors; Credit Default Swaps; Shareholder Bargaining Power; Real Effects (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2016-03, Revised 2016-06
New Economics Papers: this item is included in nep-ban and nep-cfn
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Empty creditors and strong shareholders: The real effects of credit risk trading (2016)
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