Abstract
Prior studies show that a lender’s incentive to monitor a client’s activities declines after receiving insurance on its loan via a credit default swap (CDS). We examine whether this altered debtor-creditor relation affects borrowers’ investment activities. We hypothesize that the borrower enhances activities that were previously constrained by lender monitoring. It shifts from safe to risky assets to increase the value of call options built into shareholder investments. We do not find support, on average, for this proposition. However, when managers’ wealth increases convexly with firm assets, borrowers increase risky investments and dividend payouts after the onset of CDS trading.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
