Abstract
Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of this transfer crucially hinge on the relative bargaining power of shareholders and creditors. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiation. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders decline substantially relative to other firms.
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