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Price Discovery in the CDS Market: Evidence from Corporate Acquisitions

Author

Listed:
  • Iuliana Ismailescu

    (Lubin School of Business, Pace University, One Pace Plaza, New York, NY 10038, USA)

  • Blake Phillips

    (School of Accounting and Finance, University of Waterloo, 200 University Avenue West, Waterloo, ON, Canada N2L 3G1, Canada)

  • Xiaowei Xu

    (College of Business, University of Rhode Island, 45 Upper College Rd, Kingston, RI 02881, USA)

Abstract

This study examines the contribution of credit default swaps (CDS) to price discovery in the run-up period preceding an acquisition announcement. We find that the CDS market plays a significant role in price formation before cross-border acquisitions, especially when target firms are from emerging economies. Further, the information flow from the CDS to the equity market is more pronounced when the bidder has a higher risk of default and the target nation has greater information asymmetry, weaker governance, and lower creditor protections. Our results are consistent with preferential use of the CDS market by informed traders ahead of negative credit news to hedge increased default risk or speculatively front-run widening credit spreads.

Suggested Citation

  • Iuliana Ismailescu & Blake Phillips & Xiaowei Xu, 2023. "Price Discovery in the CDS Market: Evidence from Corporate Acquisitions," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 1-33, December.
    • Handle: RePEc:wsi:qjfxxx:v:13:y:2023:i:04:n:s2010139223500143
    DOI: 10.1142/S2010139223500143
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    More about this item

    Keywords

    Price discovery; credit default swap; mergers and acquisitions; credit derivative; event study;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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