Empty creditors and strong shareholders : the real effects of credit risk trading : third draft

Stefano Colonnello, Matthias Efing, Francesca Zucchi

Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of such debt unbundling crucially hinge on shareholder bargaining power. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiations. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders drop by 7.9%, 7%, and 8.8% compared to other firms.

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Year of publication:	October 2016 ; This draft: October 16, 2016
Authors:	Colonnello, Stefano ; Efing, Matthias ; Zucchi, Francesca
Publisher:	Halle (Saale), Germany : Halle Institute for Economic Research (IWH)
Subject:	debt decoupling \| empty creditors \| credit default swaps \| shareholder bargaining power \| real effects \| Kreditrisiko \| Credit risk \| Kreditderivat \| Credit derivative \| Gläubiger \| Creditors \| Aktionäre \| Shareholders \| Theorie \| Theory \| Insolvenz \| Insolvency