Price Discovery in the CDS Market: Evidence from Corporate Acquisitions

Iuliana Ismailescu, Blake Phillips () and Xiaowei Xu ()
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Iuliana Ismailescu: Lubin School of Business, Pace University, One Pace Plaza, New York, NY 10038, USA
Blake Phillips: School of Accounting and Finance, University of Waterloo, 200 University Avenue West, Waterloo, ON, Canada N2L 3G1, Canada
Xiaowei Xu: College of Business, University of Rhode Island, 45 Upper College Rd, Kingston, RI 02881, USA

Quarterly Journal of Finance (QJF), 2023, vol. 13, issue 04, 1-33

Abstract: This study examines the contribution of credit default swaps (CDS) to price discovery in the run-up period preceding an acquisition announcement. We find that the CDS market plays a significant role in price formation before cross-border acquisitions, especially when target firms are from emerging economies. Further, the information flow from the CDS to the equity market is more pronounced when the bidder has a higher risk of default and the target nation has greater information asymmetry, weaker governance, and lower creditor protections. Our results are consistent with preferential use of the CDS market by informed traders ahead of negative credit news to hedge increased default risk or speculatively front-run widening credit spreads.

Keywords: Price discovery; credit default swap; mergers and acquisitions; credit derivative; event study (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 G20 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2010139223500143

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