The effects of credit default swap trading on information asymmetry in syndicated loans

Dan Amiram, William H. Beaver, Wayne R. Landsman and Jianxin Zhao

Journal of Financial Economics, 2017, vol. 126, issue 2, 364-382

Abstract: This study shows that initiation of credit default swap (CDS) trading for an entity's debt increases the share of loans retained by loan syndicate lead arrangers and increases loan spread. These findings are consistent with CDS initiation reducing the effectiveness of a lead arranger's stake in the loan to serve as a mechanism to address the adverse selection and moral hazard problems in the loan syndicate. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency, for loans originated by a lead arranger with a strong reputation in this market, and for firms with relatively illiquid CDS markets.

Keywords: CDS; Syndicated loans; Adverse selection; Moral hazard; Information asymmetry (search for similar items in EconPapers)
JEL-codes: D82 G21 G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:126:y:2017:i:2:p:364-382

DOI: 10.1016/j.jfineco.2016.10.001

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