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Journal of Financial Economics Vol. 126 No. 2 2017

The effects of credit default swap trading on information asymmetry in syndicated loans

Dan Amiram1; William H. Beaver2; Wayne R. Landsman3; Jianxin Zhao4

1 Columbia University · 2 Stanford University · 3 University of North Carolina at Chapel Hill · 4 Emory University

Abstract

This study shows that initiation of credit default swap (CDS) trading for an entity's debt increases the share of loans retained by loan syndicate lead arrangers and increases loan spread. These findings are consistent with CDS initiation reducing the effectiveness of a lead arranger's stake in the loan to serve as a mechanism to address the adverse selection and moral hazard problems in the loan syndicate. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency, for loans originated by a lead arranger with a strong reputation in this market, and for firms with relatively illiquid CDS markets.

DOI
10.1016/j.jfineco.2016.10.001
Volume
126
Issue
2
Pages
364-382
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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