publication . Article . 2016

Credit derivatives as a commitment device: Evidence from the cost of corporate debt

Gi H. Kim;
Open Access English
  • Published: 01 Dec 2016
  • Publisher: Elsevier Science BV
  • Country: United Kingdom
Abstract
When a firm writes incomplete debt contracts, its limited ability to commit to not strategically default and renegotiate its debt requires the firm to pay higher yields to its creditors. Hedged by credit derivatives, creditors have stronger bargaining power in the case of debt renegotiation, which ex-ante demotivates the firm to default strategically. In this paper, I aim to investigate theoretically and empirically whether credit derivatives could help reduce the cost of debt contracting stemming from the possibility of strategic default. I find that firms with a priori high strategic default incentives experience a relatively large reduction in their corporate...
Subjects
free text keywords: HG, Economics and Econometrics, Finance, Credit default swap, Recourse debt, Strategic default, Financial system, Financial economics, Credit derivative, Credit risk, Internal debt, Economics, business.industry, business, Credit default swap index, Corporate bond
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