The effects of credit default swap trading on information asymmetry in syndicated loans

Amiram, Dan; Beaver, William H.; Landsman, Wayne R.; Zhao, Jianxin

doi:10.1016/j.jfineco.2016.10.001

Cited by 107 publications

(41 citation statements)

References 31 publications

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“…Ashcraft and Santos (2009) document that the onset of CDS trading does not reduce the cost of capital for the average firm but leads to a small decrease in the cost of debt for safer and more transparent firms. Amiram et al (2017) provide evidence that CDSs reduce the effectiveness of a lead arranger's stake in the loan as a mechanism to address the information asymmetry problems in syndicated loans. The introduction of CDS trading increases the share of loans retained by the lead arrangers and increases loan spreads.…”

Section: Financing Corporate Innovationmentioning

confidence: 99%

Credit default swaps and corporate innovation

Chang

Chen

Wang

et al. 2019

Journal of Financial Economics

181

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Section: Financing Corporate Innovationmentioning

confidence: 99%

Credit default swaps and corporate innovation

Chang

Chen

Wang

et al. 2019

Journal of Financial Economics

181

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“…for solo lenders. Syndicated loans face greater coordination issues and agency problems among the consortium members, compared to solo lenders, and both problems are likely to worsen after one or more consortium lenders hedge their client risks via a CDS (Preecea and Mullineaux 1996;Ivashina 2009;Amiram, Beaver, Landsman, and Zhao, 2017). Third, our documented results are stronger when loans carry fewer financial covenants, the main device for lender monitoring (Dichev and Skinner 2002;Kim et al 2017).…”

Section: Introductionmentioning

confidence: 79%

“…Prior studies indicate that when loan is obtained from a syndicate of lenders than from a single lender, free-rider problem in monitoring and information asymmetry and coordination costs between lender and borrower are more severe, and contractual flexibility and capacity to renegotiate is lower (Preecea andMullineaux 1996, Ivashina 2009). Amiram et al (2017) document that the lead arranger's share of the loan and premium demanded by syndicate members increases following the onset of CDS trading, indicating that syndicate participants anticipate lowering of lead banker's monitoring post CDS inception. Similarly, Kim et al (2017) find lower demand for management forecasts when lead arranger has higher than the median share of loans, that is, when the lead banker has higher economic stake in the loan.…”

Section: Lender Monitoring: Syndicated Lenders Versus Sole Lendersmentioning

confidence: 99%

Heightened Shareholder Interest in Firm Affairs Following the Inception of Credit Default Swap Trade

2017

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The literature shows that a lender reduces its monitoring of client activities and decreases the accommodation it offers to a distressed client after the lender receives insurance on its outstanding client debt via a credit default swap (CDS). These changes in lender behavior can exacerbate downside risk but can also create upside potential for the reference firm's shareholders. We predict that the firm's shareholders, being the residual claimholders, would then increase their interest in firm affairs, by demanding improved corporate governance and the quality of financial reports. We find an increase in independence of the board of directors and a decline in the dual position of chief executive officer and board chairman following the onset of CDS trading. We also find higher earnings response coefficient and trading volumes around the earnings announcement dates and lower post-earnings announcement drift. Overall, our results suggest that shareholders demand and obtain higher quality of, or pay greater attention to, financial reports in the years following the onset of CDS trading.

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“…Amiram et al. () examine how the availability of CDS affects at‐issue loan spreads. Using syndicated loan data from 1993 to 2014, they provide evidence that loan spreads increase after CDS initiation on a borrower.…”

mentioning

confidence: 99%

“…A growing literature examines the influence of CDS on bond and loan pricing using primary market (at-issue) yields. 2 Amiram et al (2017) examine how the availability of CDS affects atissue loan spreads. Using syndicated loan data from 1993 to 2014, they provide evidence that loan spreads increase after CDS initiation on a borrower.…”

mentioning

confidence: 99%

Credit Insurance, Distress Resolution Costs, and Bond Spreads

Narayanan¹,

Uzmanoglu

2018

Financial Management

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Credit default swaps (CDS) introduce friction in debt renegotiations as they alter the incentives of creditors insured with CDS to favor bankruptcy instead of restructuring debt out of court. Such renegotiation friction can increase bond spreads by increasing distress resolution costs. Alternatively, they can decrease bond spreads by deterring the firm from strategic default. Using newly available data on firm‐level CDS positions to proxy for the extent of CDS insurance, we find that bond spreads increase with CDS insurance. Additional tests indicate that this increase is associated with the effect CDS insurance has on increasing distress resolution costs. These results, which are robust to endogeneity concerns associated with CDS insurance, provide evidence that credit insurance can affect a firm's cost of debt.

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The effects of credit default swap trading on information asymmetry in syndicated loans

Cited by 107 publications

References 31 publications

Credit default swaps and corporate innovation

Credit default swaps and corporate innovation

Heightened Shareholder Interest in Firm Affairs Following the Inception of Credit Default Swap Trade

Credit Insurance, Distress Resolution Costs, and Bond Spreads

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