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Credit derivatives as a commitment device : evidence from the cost of corporate debt
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Kim, Gi Hyun (2016) Credit derivatives as a commitment device : evidence from the cost of corporate debt. Journal of Banking & Finance, 73 . pp. 67-83. doi:10.1016/j.jbankfin.2016.08.007 ISSN 0378-4266.
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Official URL: http://dx.doi.org/10.1016/j.jbankfin.2016.08.007
Abstract
When a firm writes incomplete debt contracts, its limited ability to commit to not strategically default and renegotiate its debt requires the firm to pay higher yields to its creditors. Hedged by credit derivatives, creditors have stronger bargaining power in the case of debt renegotiation, which ex-ante demotivates the firm to default strategically. In this paper, I aim to investigate theoretically and empirically whether credit derivatives could help reduce the cost of debt contracting stemming from the possibility of strategic default. I find that firms with a priori high strategic default incentives experience a relatively large reduction in their corporate bond spreads after the introduction of credit default swaps (CDS) written on their debt. This result is robust to controlling for the endogeneity of CDS introduction. My finding is consistent with the presence of CDS reducing the strategic default-related cost of corporate debt, suggesting the beneficial role of credit derivatives as a commitment device for the borrower to repay the lender.
Item Type: | Journal Article | ||||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Corporate debt, Debtor and creditor, Bonds | ||||||||||
Journal or Publication Title: | Journal of Banking & Finance | ||||||||||
Publisher: | Elsevier Science BV | ||||||||||
ISSN: | 0378-4266 | ||||||||||
Official Date: | December 2016 | ||||||||||
Dates: |
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Volume: | 73 | ||||||||||
Page Range: | pp. 67-83 | ||||||||||
DOI: | 10.1016/j.jbankfin.2016.08.007 | ||||||||||
Status: | Peer Reviewed | ||||||||||
Publication Status: | Published | ||||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||||
Date of first compliant deposit: | 16 September 2016 | ||||||||||
Date of first compliant Open Access: | 9 March 2018 |
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