The Effects of CDS Trading on Information Asymmetry in Syndicated Loans

54 Pages Posted: 19 Jun 2015 Last revised: 8 Jun 2017

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

William H. Beaver

Stanford University

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Jianxin (Donny) Zhao

Emory University

Date Written: October 30, 2016

Abstract

This study shows that initiation of CDS trading for an entity’s debt increases the share of loans retained by loan syndicate lead arrangers and increases loan spread. These findings are consistent with CDS initiation reducing the effectiveness of a lead arranger’s stake in the loan to serve as a mechanism to address the adverse selection and moral hazard problems in the loan syndicate. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency, for loans originated by a lead arranger with a strong reputation in this market, and for firms with relatively illiquid CDS markets.

Keywords: CDS, Syndicated loans, Adverse selection, Moral hazard, Information asymmetry

Suggested Citation

Amiram, Dan and Beaver, William H. and Landsman, Wayne R. and Zhao, Jianxin (Donny), The Effects of CDS Trading on Information Asymmetry in Syndicated Loans (October 30, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2619868 or http://dx.doi.org/10.2139/ssrn.2619868

Dan Amiram

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Wayne R. Landsman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Jianxin (Donny) Zhao

Emory University ( email )

464 Goizueta Business School
Atlanta, GA 30322
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
334
rank
87,508
Abstract Views
1,671
PlumX Metrics