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Credit Default Swaps, Exacting Creditors and Corporate Liquidity Management

Author

Listed:
  • Marti G. Subrahmanyam

    (Stern School of Business, New York University)

  • Dragon Yongjun Tang

    (Faculty of Business and Economics, University of Hong Kong)

  • Sarah Qian Wang

    (Warwick Business School, University of Warwick)

Abstract

We investigate the liquidity management of firms following the inception of credit default swaps (CDS) markets on their debt, which allow hedging and speculative trading on credit risk to be carried out by creditors and other parties. We find that reference firms hold more cash after CDS trading commences on their debt. The increase in cash holdings is more pronounced for CDS firms that do not pay dividends and have a higher marginal value of liquidity. For CDS firms with higher cash ow volatility, these increased cash holdings do not entail higher leverage. Overall, our findings are consistent with the view that CDS-referenced firms adopt more conservative liquidity policies to avoid negotiations with more exacting creditors.

Suggested Citation

  • Marti G. Subrahmanyam & Dragon Yongjun Tang & Sarah Qian Wang, 2016. "Credit Default Swaps, Exacting Creditors and Corporate Liquidity Management," Working Papers 202016, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:202016
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    References listed on IDEAS

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    Cited by:

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    2. Jie Chen & Woon Sau Leung & Wei Song & Davide Avino, 2018. "Does CDS trading affect risk-taking incentives in managerial compensation?," Working Papers 2018-19, Swansea University, School of Management.
    3. Colonnello, Stefano & Efing, Matthias & Zucchi, Francesca, 2016. "Empty creditors and strong shareholders: The real effects of credit risk trading," IWH Discussion Papers 10/2016, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    Credit default swaps; Cash; Liquidity; Empty creditors;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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