Credit default swaps, exacting creditors and corporate liquidity management

Subrahmanyam, Marti G.; Tang, Dragon Yongjun; Wang, Sarah Qian

doi:10.1016/j.jfineco.2017.02.001

Cited by 113 publications

(83 citation statements)

References 39 publications

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“…Martin and Roychowdhury () associate the onset of CDS trading with changes in accounting practices and report evidence that firms’ accounting conservatism declines due to reduced monitoring efforts by lenders. Subrahmanyam et al () report that firms, especially distressed firms, tend to retain higher cash holdings and adopt more conservative liquidity policies after the commencement of CDS trading.…”

Section: Prior Literature and Hypotheses Developmentmentioning

confidence: 99%

The externalities of credit default swaps on stock return synchronicity

Zhao

Zhu

2019

Journal of Futures Markets

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We examine the externality effect of customer firms’ credit default swap (CDS) trading on the stock price informativeness of supplier firms. Our empirical results show that firms with a high proportion of sales to CDS referenced customers tend to have more firm‐specific embedded information in their stock prices and thus higher stock price informativeness, which is associated with a lower level of stock return synchronicity. We provide new evidence of CDS trading externality on equity market information environments along the supply chain.

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Section: Prior Literature and Hypotheses Developmentmentioning

confidence: 99%

The externalities of credit default swaps on stock return synchronicity

Zhao

Zhu

2019

Journal of Futures Markets

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“…In fact, CDS-insured creditors become more likely to push borrowers into inefficient bankruptcy to obtain default payment from CDS sellers during liquidation [14,48]. In response to this empty creditor problem caused by CDSs, managers tend to hold more cash [49]. Consequently, firms in financial distress may now become more vulnerable when CDSs are traded on their debt and less willing to invest in risky innovation projects.…”

Section: Discussionmentioning

confidence: 99%

“…The third one is short-term debt (Debt_S), measured as total current, short-term debt divided by total assets. Following Ashcraft and Santos [47], Saretto and Tookes [40], and Subrahmanyam et al [48,49], we define CDS Trading (Trading) as one, for a CDS firm, after the inception of the firm's CDS trading, and zero otherwise. This indicator variable, Trading, allows us to exploit the impact of the CDS trade inception of a firm on the relation between debt and innovation.…”

Section: Variablesmentioning

confidence: 99%

The Interdependence of Debt and Innovation Sustainability: Evidence from the Onset of Credit Default Swaps

Chen

Zhang

2019

Sustainability

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Innovation sustainability requires sustainable financing. Extensive research suggests that debt is a disfavored source of innovation financing. In this study, we show that a recent financial development, credit default swaps (CDSs), may change the institutional logics of debt, making debt useful to the financing innovation. To be specific, we find that with CDS protection, creditors become less concerned with a borrowing firm’s credit risk and risk taking, making debt tolerant of early failures and reducing the negative impact of debt on the process of Innovation. In addition, we find that the availability of CDSs is more likely to change the nature of long-term debt than that of short-term debt, making long-term debt a useful instrument for the financing of innovation. Finally, the mitigation effect of CDS on the relation between debt and innovation is more pronounced for CDS firms with higher pay sensitivity to stock price volatility (Vega) and less financial constraints, revealing that a CEO’s incentive, rather than the relaxed financing constraints, is the underlying channel for the reduced negative impact of debt on innovation after CDS trading.

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“…Firstly, the increase in leverage associated with CDS may not result in welfare benefits if it leads to inefficiently high precautionary cash holding (Subrahmanyam et al (2016)) rather than an increase in investment. We show that this is not actually the case and that CDS firms do indeed make more acquisition investments.…”

Section: Discussionmentioning

confidence: 99%

Credit Default Swaps, Financial Distress and Corporate Acquisitions

Guest,

Karampatsas,

Petmezas

et al. 2017

SSRN Journal

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Credit default swaps, exacting creditors and corporate liquidity management

Cited by 113 publications

References 39 publications

The externalities of credit default swaps on stock return synchronicity

The externalities of credit default swaps on stock return synchronicity

The Interdependence of Debt and Innovation Sustainability: Evidence from the Onset of Credit Default Swaps

Credit Default Swaps, Financial Distress and Corporate Acquisitions

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