Do Credit Default Swaps Matter After They Are Settled? Evidence from Debt Recovery Rates
48 Pages Posted: 30 Aug 2014 Last revised: 13 Jan 2016
Date Written: January 12, 2016
We provide the first empirical analysis on the effects of credit default swaps (CDS) on corporate distress resolution with a focus on debt recovery rate. CDS contracts are settled shortly after the occurrence of credit events such as restructuring or bankruptcy filings and, presumably, should cease to be relevant after the settlements. However, we find that the ultimate debt recovery rates, which are determined in the final resolution plan and long after the CDS settlements, are higher for the bankrupt firms with CDS contracts before bankruptcy filings. This CDS effect on recovery rates is more pronounced for bonds than for loans. The overall evidence is consistent with the view that CDS trigger earlier bankruptcy filings, leaving more valuable assets for bondholders in the bankrupt entities.
Keywords: Credit default swaps (CDS), Recovery rate, Loss given default (LGD), Credit risk
JEL Classification: G33, G34, G32, G30, G10
Suggested Citation: Suggested Citation