Identifying Empty Creditors with a Shock and Micro-Data

Hans Degryse, Yalin Gündüz, Kuchulain O'Flynn and Steven Ongena
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Kuchulain O'Flynn: University of Zurich - Department of Banking and Finance; Swiss Finance Institute

No 20-15, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors'' as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany, that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for firms with CDS traded on them drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Further, we find that firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained, and that are liquidity constrained recognise the empty creditor effect to a larger extent. Furthermore, banks' business models affect the degree to which they recognise the empty creditor effect. Where banks that monitor their creditors less and that earn a smaller portion of their income from interest activities, recognise the empty creditor effect to a larger extent.

Keywords: Empty creditors; default; bankruptcy; credit default swaps; micro-data (search for similar items in EconPapers)
JEL-codes: G21 G33 G38 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2020-02
New Economics Papers: this item is included in nep-cfn
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Related works:
Working Paper: Identifying Empty Creditors with a Shock and Micro-Data (2021)
Working Paper: Identifying empty creditors with a shock and micro-data (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2015

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