Do credit default swaps impact lenders’ monitoring of loans?

Naceur Essaddam (), Miran Hossain () and Tashfeen Hussain ()
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Naceur Essaddam: Royal Military College of Canada
Miran Hossain: University of North Carolina
Tashfeen Hussain: Mount Royal University

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 2, No 6, 567-600

Abstract: 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.

Keywords: Creditor monitoring; Loan covenants; Covenant comprehensives and intensity; Credit default swap (search for similar items in EconPapers)
JEL-codes: G20 G21 G23 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-023-01159-y

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