Internal Governance and Creditor Governance: Evidence from Credit Default Swaps
51 Pages Posted: 28 Apr 2013 Last revised: 17 Dec 2016
Date Written: December 16, 2016
I study the relation between internal governance and creditor governance. A deterioration in creditor governance may increase the agency costs of debt and managerial opportunism at the expense of shareholders. I exploit the introduction of credit default swaps (CDS) as a negative shock to creditor governance. I provide evidence consistent with shareholders pushing for a substitution effect between internal governance and creditor governance. Following CDS introduction, CDS firms reduce managerial risk-taking incentives relative to other firms. At the same time, after the start of CDS trading, CDS firms increase managerial wealth-performance sensitivity, board independence, and CEO turnover performance-sensitivity relative to other firms.
Keywords: Creditor Governance, Credit Default Swaps, Empty Creditors
JEL Classification: G32, G34
Suggested Citation: Suggested Citation