Shareholder Bargaining Power and the Emergence of Empty Creditors

55 Pages Posted: 4 Jun 2016 Last revised: 29 Jun 2018

See all articles by Stefano Colonnello

Stefano Colonnello

University of Magdeburg; Halle Institute for Economic Research

Matthias Efing

HEC Paris - Finance Department; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Francesca Zucchi

Federal Reserve Board

Date Written: June 29, 2018

Abstract

Credit default swaps (CDSs) can create empty creditors who may push borrowers into inefficient bankruptcy but also reduce shareholders' incentives to default strategically. We show theoretically and empirically that the presence and the effects of empty creditors on firm outcomes depend on the distribution of bargaining power among claimholders. Firms are more likely to have empty creditors if these would face powerful shareholders in debt renegotiation. The empirical evidence confirms that more CDS insurance is written on firms with strong shareholders and that CDSs increase the bankruptcy risk of these same firms. The ensuing effect on firm value is negative.

Keywords: Empty Creditors, Credit Default Swaps, Bargaining Power, Real Effects

JEL Classification: G32, G33, G34

Suggested Citation

Colonnello, Stefano and Efing, Matthias and Zucchi, Francesca, Shareholder Bargaining Power and the Emergence of Empty Creditors (June 29, 2018). Swiss Finance Institute Research Paper No. 16-17; Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2787062 or http://dx.doi.org/10.2139/ssrn.2787062

Stefano Colonnello (Contact Author)

University of Magdeburg

Universitaetsplatz 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Matthias Efing

HEC Paris - Finance Department ( email )

France
(++33)695646755 (Phone)

HOME PAGE: http://matthiasefing.com/

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Francesca Zucchi

Federal Reserve Board ( email )

20th and C Street NW
Washington, DC 20551
United States

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