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Credit default swaps, strategic default, and the cost of corporate debt
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Kim, Gi Hyun (2013) Credit default swaps, strategic default, and the cost of corporate debt. Working Paper. Coventry, UK: University of Warwick.
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Official URL: http://dx.doi.org/10.2139/ssrn.2230394
Abstract
In this paper, I provide the evidence of credit default swaps (CDS, hereafter) playing new economic roles as a commitment device for the borrower (i.e. the firm) to repay its debt to the lender (i.e. the creditors). When the firm writes incomplete debt contracts, its limited ability to commit not to default strategically in the future incurs the cost of contracting that will be ultimately paid by the firm. CDS can reduce this cost ex ante by strengthening creditors’ bargaining power in distressed debt renegotiation. I identify, both theoretically and empirically, the benefit of CDS reducing the contracting cost arising from the possibility of strategic default. More specifically, I show that firms a priori most likely to face the limited commitment problem (i.e. firms with high strategic default incentives) experience a relatively larger reduction in their corporate bond spreads following the introduction
of CDS.
Item Type: | Working or Discussion Paper (Working Paper) | ||||||
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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): | Credit derivatives, Swaps (Finance), Default (Finance) | ||||||
Journal or Publication Title: | Social Science Research Network | ||||||
Publisher: | University of Warwick | ||||||
Place of Publication: | Coventry, UK | ||||||
Official Date: | 15 April 2013 | ||||||
Dates: |
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Number of Pages: | 51 | ||||||
Status: | Peer Reviewed | ||||||
Access rights to Published version: | Open Access (Creative Commons) |
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