Do Empty Creditors Matter? Evidence from Distressed Exchange Offers
Georgia Institute of Technology - Scheller College of Business
October 5, 2015
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.
Number of Pages in PDF File: 42
Keywords: CDS, empty creditors, distressed exchange offer, restructuring, bankruptcy
JEL Classification: G33, G34
Date posted: February 8, 2012 ; Last revised: December 7, 2015