Do empty creditors matter? Evidence from distressed exchange offers

András Danis*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract (may include machine translation)

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.

Original languageEnglish
Pages (from-to)1285-1301
Number of pages17
JournalManagement Science
Volume63
Issue number5
DOIs
StatePublished - May 2017
Externally publishedYes

Keywords

  • Bankruptcy
  • CDS
  • Credit default swaps
  • Empty creditor
  • Restructuring

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