Identifying Empty Creditors with a Shock and Micro-Data

Abstract

Firms with credit-default swaps (CDS) traded on their debt may face as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for CDS firms drops when the effect of empty creditors is removed. The intensity of this empty creditor effect varies with firm, bank-firm, and creditor hedging characteristics.