Dark Knights: The Rise in Firm Intervention by CDS Investors

67 Pages Posted: 4 Nov 2019 Last revised: 11 Nov 2019

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: November 2, 2019

Abstract

We document an increase in cases where credit default swap (CDS) investors intervene in the restructuring of a distressed firm. In our theoretical analysis, we show that—contrary to popular belief—intervention by CDS investors is not necessarily reducing firm value. While the equilibrium CDS spread seems excessive for the protection buyer, that cost is offset by the reduced probability of liquidation. Ex ante borrowing costs go down, and investment and firm value both increase. Under certain assumptions, investment reaches first-best. Our results suggest that the empty creditor problem could be at least partially solved by CDS investor intervention.

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 (November 2, 2019). WBS Finance Group Research Paper; Georgia Tech Scheller College of Business Research Paper No. 3479635. Available at SSRN: https://ssrn.com/abstract=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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