Shareholder bargaining power and the emergence of empty creditors

Stefano Colonnello, Matthias Efing and Francesca Zucchi

Journal of Financial Economics, 2019, vol. 134, issue 2, 297-317

Abstract: Credit default swaps (CDSs) can create empty creditors who potentially force borrowers into inefficient bankruptcy but also reduce shareholders’ incentives to default strategically. We show theoretically and empirically that the presence and the effects of empty creditors on firm outcomes depend on the distribution of bargaining power among claimholders. If creditors would face powerful shareholders in debt renegotiation, firms are more likely to face the empty creditor problem. The empirical evidence confirms that more CDS insurance is written on firms with strong shareholders and that CDSs increase the bankruptcy risk of these same firms. The ensuing effect on firm value is negative.

Keywords: Empty creditors; Credit default swaps; Bargaining power; Real effects of financial markets (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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Working Paper: Shareholder bargaining power and the emergence of empty creditors (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:134:y:2019:i:2:p:297-317

DOI: 10.1016/j.jfineco.2019.04.001

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