Heightened Shareholder Interest in Firm Affairs Following the Inception of Credit Default Swap Trade

67 Pages Posted: 4 Jan 2018 Last revised: 28 Feb 2018

See all articles by Hyun A. Hong

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Ji Woo Ryou

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Anup Srivastava

University of Calgary - Haskayne School of Business

Date Written: December 31, 2017

Abstract

The literature shows that a lender becomes reluctant to aid a distressed client after it receives insurance on its outstanding debt via a credit default swap (CDS). The onset of CDS trade thus accelerates client bankruptcy. We predict that the client firm’s shareholders would respond by demanding improved corporate governance and financial reporting quality to protect their interests. We find an increase in independence of the board of directors and a decline in the dual position of chief executive office and board chairman following the onset of CDS trading. We also find higher earnings response coefficient and trading volumes around the earnings announcement dates and lower post–earnings announcement drift. Overall, our results are consistent with the idea that shareholders demand higher quality of, or pay greater attention to, financial reports following the onset of CDS trading.

Keywords: credit default swap, agency conflict, corporate governance, financial reporting quality, bankruptcy

JEL Classification: G32, G33, M41, M48

Suggested Citation

Hong, Hyun A. and Ryou, Ji Woo and Srivastava, Anup, Heightened Shareholder Interest in Firm Affairs Following the Inception of Credit Default Swap Trade (December 31, 2017). Tuck School of Business Working Paper No. 3094968. Available at SSRN: https://ssrn.com/abstract=3094968 or http://dx.doi.org/10.2139/ssrn.3094968

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Ji Woo Ryou

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Dr.
BUSA 220
Edinburg, TX 78539
United States
956-665-8073 (Phone)

Anup Srivastava (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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