The Effects of CDS Trading on Information Asymmetry in Syndicated Loans
54 Pages Posted: 19 Jun 2015 Last revised: 8 Jun 2017
Date Written: October 30, 2016
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
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