The Library
Essays on costs and benefits of credit default swaps
Tools
Lashova, Anastasiia (2019) Essays on costs and benefits of credit default swaps. PhD thesis, University of Warwick.
|
PDF
WRAP_Theses_Lashova_2019.pdf - Submitted Version - Requires a PDF viewer. Download (1388Kb) | Preview |
Official URL: http://webcat.warwick.ac.uk/record=b3501355~S15
Abstract
The thesis comprises three essays which reveal previously undetected costs and benefits of Credit Default Swaps (CDSs).
Chapter 2 empirically studies the effect of credit derivatives on employees – one of firms’ key non-financial stakeholders. We find that CDSs increase employee compensation for both non-executive and executive workers. The positive effect on the base pay increases with employees’ bargaining power and their expected exposure to unemployment risk. Unlike general workers, the growth of CEO compensation is mainly driven by performance-sensitive pay with higher vega in compensation structure. In addition, CDSs improve overall labor welfare due to wider cash profit sharing and enhanced health and safety programs. These findings are consistent with the increased workers’ concerns on human capital risk and enhanced interest-alignment between shareholders and employees in CDS firms.
Chapters 3 and 4 shed new light on the effect of CDSs on financial contracting. In Chapter 3, we theoretically examine whether creditors’ access to the CDS market changes their incentive to use traditional tools of financial contracting, such as debt covenants, for protection of their interests. We find that CDS-protected lenders can have a lower incentive to include covenants in loan agreements. But the reason of this reduced incentive lies not in the substitutive effect of the CDS market, discussed broadly in empirical literature, rather in its detrimental effect on covenant effectiveness. Our model demonstrates debt covenants as a more universal tool for debt protection, the effectiveness of which in the presence of CDS trading is mainly determined by the probability of creditors to turn into empty creditors and force a liquidation.
Chapter 4 provides strong empirical support for the comparative statics predictions developed in Chapter 3. Unlike covenants, CDSs do not alleviate, but enhance investment distortions created by debt overhang. The investment-distortion effect of CDSs is more prominent for firms with the higher likelihood of the empty creditor threat, such as for the higher amount of CDS insurance written on firms and/or the weaker firms’ fundamentals. Further analysis reveals that, in the post - CDS inception, covenants lose their effectiveness as a mechanism against no-commitment. The CDS market undermines shareholders’ incentive to undertake valuable investment despite the presence of strict covenants in a loan contract.
Item Type: | Thesis (PhD) | ||||
---|---|---|---|---|---|
Subjects: | H Social Sciences > HG Finance | ||||
Library of Congress Subject Headings (LCSH): | Swaps (Finance), Default (Finance), Credit derivatives | ||||
Official Date: | September 2019 | ||||
Dates: |
|
||||
Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Gamba, Andrea (Professor of finance) ; Wang, Sarah Qian | ||||
Format of File: | |||||
Extent: | vii, 166 leaves : illustrations (some colour) | ||||
Language: | eng |
Request changes or add full text files to a record
Repository staff actions (login required)
View Item |
Downloads
Downloads per month over past year