Credit default swaps and bondholder governance☆

초록

We investigate the effects of credit default swap (CDS) trading on bondholder monitoring and corporate default risk. Because of the CDS protection against potential losses from bankruptcy, bondholders as well as bank lenders are less incentivized to monitor firms. However, bondholders may also increase their own monitoring in order to substitute for their reliance on bank lender monitoring. Using data on U.S. non-financial firms from 2003 to 2020, we find that CDS initiation reduces bondholders' demand for bond covenants as monitoring tools, which, in turn, worsens corporate failure probability. Our findings imply that the availability of CDS alters the monitoring incentives of bondholders and thereby affects the fundamental value of the underlying firms. Thisbondholder monitoring channel operates distinctively from the empty creditor channel.

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