Working Paper: CEPR ID: DP16773
Authors: Hans Degryse; Yalin Gündüz; Kuchulain O'Flynn; Steven Ongena
Abstract: Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors" as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for CDS firms drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained and that are liquidity constrained embed the empty creditor effect into their probability of default estimates of affected firms to a larger extent. So do banks that monitor their creditors less and that earn a smaller portion of their income from interest activities.
Keywords: empty creditors; default; bankruptcy; credit default swaps; microdata
JEL Codes: G21; G33; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Empty creditors (G51) | Firms' probability of default (G33) |
| Removal of empty creditors (G33) | Firms' probability of default (G33) |
| Higher average CDS hedge positions (G19) | Empty creditor effect (F65) |
| Longer credit relationships (G51) | Effect of empty creditors (G33) |
| Higher collateral ratios (G32) | Effect of empty creditors (G33) |
| Financially safer firms (G32) | Effect of empty creditors (G33) |
| Riskier firms (G32) | Effect of empty creditors (G33) |
| Liquidity constrained banks (G21) | Empty creditor effect (F65) |
| Less monitoring by banks (G21) | Empty creditor effect (F65) |