Dark Knights: The Rise in Firm Intervention by CDS Investors

97 Pages Posted: 4 Nov 2019 Last revised: 23 Jan 2023

See all articles by Andras Danis

Andras Danis

Central European University (CEU)

Andrea Gamba

University of Warwick - Finance Group

Date Written: January 20, 2023


There have been several cases in recent years where credit default swap (CDS) buyers and sellers intervene in the restructuring of a distressed firm. We show theoretically that this can increase firm value. Intervention by CDS buyers solves the commitment problem between equity- and debt-holders but increases the probability 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 (January 20, 2023). WBS Finance Group Research Paper No. 265, Georgia Tech Scheller College of Business Research Paper No. 3479635, Forthcoming Management Science, Available at SSRN: https://ssrn.com/abstract=3479635 or http://dx.doi.org/10.2139/ssrn.3479635

Andras Danis (Contact Author)

Central European University (CEU) ( email )

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Vienna, Lower-Austria and Wien 1100

HOME PAGE: http://https://www.andrasdanis.com

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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