In this paper, we examine the effect of credit defaults swaps (CDS) initiation on reference firms' cost management strategies. CDS contracts provide insurance protection for creditors, inducing a shift in bargaining power from borrowers to creditors and an excessive incidence of bankruptcy. Anticipating more intransigent creditors in debt renegotiations and higher bankruptcy risk, CDS firms are incentivized to mitigate risk through decreasing cost stickiness after CDS initiation, as cost stickiness lowers liquidity and triggers early covenant violations. We find that, on average, CDS initiation is associated with a decline in reference firms' cost stickiness. This association is more pronounced for less liquid, financially distressed, and lower credit quality firms. We also find that CDS firms with a reduction in cost stickiness will exhibit lower future bankruptcy risk than CDS firms without such as reduction in stickiness. Collectively, our findings suggest that the CDS-induced “empty creditor problem” causes reference firms to undertake more conservative cost management practices to alleviate downside risk.

Prior literature documents that multiple directorships are negatively associated with operating performance due to overly busy directors; however, multiple directorships may also increase firm value because directors gain access to valuable connections, resources, and information through their multiple appointments. This paper examines M&A that terminate target firms' entire boards as a negative shock to both board busyness and connections at other firms, as a complement to Hauser (2018). We document that firms experiencing a decrease in multiple directorships due to M&A exhibit improved operating performance, monitoring, and strategic advising, on average. Firms with the smallest decrease in board connections experience the greatest improvement in operating performance and advising, while firms with the greatest decrease in board connections experience null or negative effects on operating performance and advising. Our findings provide new evidence of the costs and benefits of multiple directorships based on board busyness and connections.