Derivatives Trading and Negative Voting

Abstract

This paper exposits a model of parallel trading of corporate securities (shares, bonds) and derivatives (TRS, CDS) in which a large trader can sometimes profitably acquire securities with their corporate control rights for the sole purpose of reducing the corporation's value and gaining on a net short position created through off-setting derivatives. At other times, the large trader profitably takes a net long position. The large trader requires no private information beyond its own trades. The problem is most likely to manifest when derivatives trade on an exchange and transactions give blocking powers to small minorities, particularly out-of-bankruptcy restructurings and freezeouts.

JEL Classification: G34, K22