Credit Default Swaps and Lender Incentives in Bank Debt Renegotiations

58 Pages Posted: 21 Dec 2014 Last revised: 24 Feb 2022

See all articles by Indraneel Chakraborty

Indraneel Chakraborty

University of Miami

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Rohan Ganduri

Emory University

Date Written: February 23, 2022

Abstract

Using a regression-discontinuity design and within lender-borrower variation, we analyze how Credit Default Swaps (CDS) affect bank incentives and borrower outcomes in renegotiations after covenant violations. While existing studies document an investment decline after covenant violations, we find that covenant-violating firms maintain their investment subsequent to the introduction of CDS trading. Moreover, after CDS introduction, covenant-violating firms are less likely to default. Our results suggest that in the private debt markets, CDS discipline borrowers, while the empty creditor problem due to CDS is mitigated because of lenders' reputation concerns and lower coordination frictions.

Keywords: Credit Default Swaps, Bank Lending, Empty Creditor Problem, Moral Hazard.

JEL Classification: G21, G31, G32

Suggested Citation

Chakraborty, Indraneel and Chava, Sudheer and Ganduri, Rohan, Credit Default Swaps and Lender Incentives in Bank Debt Renegotiations (February 23, 2022). Georgia Tech Scheller College of Business Research Paper No. 2015-20, Available at SSRN: https://ssrn.com/abstract=2541102 or http://dx.doi.org/10.2139/ssrn.2541102

Indraneel Chakraborty

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://https://fintech.gatech.edu

Rohan Ganduri (Contact Author)

Emory University ( email )

1300 Clifton Rd
Atlanta, GA 30322
United States

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