Do Empty Creditors Matter? Evidence from Distressed Exchange Offers
In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006–2011, I show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its d...
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| Published in | Management science Vol. 63; no. 5; pp. 1285 - 1301 |
|---|---|
| Main Author | |
| Format | Journal Article |
| Language | English |
| Published |
Linthicum
INFORMS
01.05.2017
Institute for Operations Research and the Management Sciences |
| Subjects | |
| Online Access | Get full text |
| ISSN | 0025-1909 1526-5501 |
| DOI | 10.1287/mnsc.2015.2375 |
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| Abstract | In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006–2011, I show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its debt. To address endogeneity concerns, I use the introduction of the Big Bang Protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out of court. This is important because it can increase the likelihood of future bankruptcy, which is inefficient. The findings are consistent with the empty creditor hypothesis, which posits that bondholders who are hedged with CDSs are less likely to participate in a debt restructuring. The paper also contains direct evidence for the existence of empty creditors.
This paper was accepted by Amit Seru, finance
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| AbstractList | In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006-2011,1 show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its debt. To address endogeneity concerns, I use the introduction of the Big Bang Protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out of court. This is important because it can increase the likelihood of future bankruptcy, which is inefficient. The findings are consistent with the empty creditor hypothesis, which posits that bondholders who are hedged with CDSs are less likely to participate in a debt restructuring. The paper also contains direct evidence for the existence of empty creditors. In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006–2011, I show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its debt. To address endogeneity concerns, I use the introduction of the Big Bang Protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out of court. This is important because it can increase the likelihood of future bankruptcy, which is inefficient. The findings are consistent with the empty creditor hypothesis, which posits that bondholders who are hedged with CDSs are less likely to participate in a debt restructuring. The paper also contains direct evidence for the existence of empty creditors. This paper was accepted by Amit Seru, finance. In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006–2011, I show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its debt. To address endogeneity concerns, I use the introduction of the Big Bang Protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out of court. This is important because it can increase the likelihood of future bankruptcy, which is inefficient. The findings are consistent with the empty creditor hypothesis, which posits that bondholders who are hedged with CDSs are less likely to participate in a debt restructuring. The paper also contains direct evidence for the existence of empty creditors. This paper was accepted by Amit Seru, finance . In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006-2011, I show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its debt. To address endogeneity concerns, I use the introduction of the Big Bang Protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out of court. This is important because it can increase the likelihood of future bankruptcy, which is inefficient. The findings are consistent with the empty creditor hypothesis, which posits that bondholders who are hedged with CDSs are less likely to participate in a debt restructuring. The paper also contains direct evidence for the existence of empty creditors. In this paper, I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Using a sample of U.S. distressed exchange offers during the period 2006-2011, I show that the participation rate among bondholders is significantly lower if the firm has CDSs traded on its debt. To address endogeneity concerns, I use the introduction of the Big Bang Protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out of court. This is important because it can increase the likelihood of future bankruptcy, which is inefficient. The findings are consistent with the empty creditor hypothesis, which posits that bondholders who are hedged with CDSs are less likely to participate in a debt restructuring. The paper also contains direct evidence for the existence of empty creditors. History: Accepted by Amit Seru, finance. Supplemental Material: The online appendix is available at Keywords: credit default swaps * CDS * empty creditor * restructuring * bankruptcy |
| Audience | Trade Academic |
| Author | Danis, Andrés |
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| Cites_doi | 10.1093/rfs/hhw068 10.1111/j.1540-6261.1996.tb02700.x 10.2307/2118416 10.1016/0304-405X(90)90059-9 10.2139/ssrn.1748604 10.2307/3666127 10.1111/jmcb.12294 10.1093/rfs/hhu038 10.1016/S0929-1199(01)00019-0 10.1016/j.jbankfin.2015.02.019 10.21314/JCR.2009.087 10.1016/j.jfs.2007.03.001 10.1111/j.1468-036X.2008.00450.x 10.1086/430870 10.1093/rfs/hht007 10.1016/0304-405X(90)90060-D 10.1016/j.jmoneco.2009.03.008 10.1093/rfs/hhr002 |
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| SubjectTerms | Bankruptcy CDS Corporate reorganizations Courts Credit default swaps Creditors Debt restructuring Empty empty creditor Management research restructuring |
| Title | Do Empty Creditors Matter? Evidence from Distressed Exchange Offers |
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