Dark Knights: The Rise in Firm Intervention by CDS Investors

84 Pages Posted: 4 Nov 2019 Last revised: 11 May 2022

See all articles by Andras Danis

Andras Danis

Georgia Institute of Technology - Scheller College of Business

Andrea Gamba

University of Warwick - Finance Group

Date Written: March 28, 2022

Abstract

We document a variety of empirical cases where credit default swap (CDS) buyers and sellers intervene in the restructuring of a distressed firm and show the- oretically that this can increase firm value. Intervention by CDS buyers solves the commitment problem between equity- and debtholders but increases the prob- ability of inefficient liquidation. Intervention by CDS sellers reduces the issue of excessive liquidation while keeping the benefits of CDS buyer intervention. Having both types of intervention decouples the commitment problem from the liquidation problem. Under certain assumptions, the so-called empty creditor problem can be solved and firm value reaches first-best.

Keywords: credit default swaps, CDS, empty creditor, bankruptcy, hedge fund activism

JEL Classification: G33, G34

Suggested Citation

Danis, Andras and Gamba, Andrea, Dark Knights: The Rise in Firm Intervention by CDS Investors (March 28, 2022). WBS Finance Group Research Paper No. 265, Georgia Tech Scheller College of Business Research Paper No. 3479635, Available at SSRN: https://ssrn.com/abstract=3479635 or http://dx.doi.org/10.2139/ssrn.3479635

Andras Danis (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://scheller.gatech.edu/danis

Andrea Gamba

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

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