Dark Knights: The Rise in Firm Intervention by CDS Investors
84 Pages Posted: 4 Nov 2019 Last revised: 11 May 2022
Date Written: March 28, 2022
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: Suggested Citation