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Identifying Empty Creditors with a Shock and Micro-Data

Author

Listed:
  • Hans Degryse

    (KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR))

  • Yalin Gündüz

    (Deutsche Bundesbank)

  • Kuchulain O'Flynn

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

Abstract
Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors'' 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 firms with CDS traded on them drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Further, we find that firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained, and that are liquidity constrained recognise the empty creditor effect to a larger extent. Furthermore, banks' business models affect the degree to which they recognise the empty creditor effect. Where banks that monitor their creditors less and that earn a smaller portion of their income from interest activities, recognise the empty creditor effect to a larger extent.

Suggested Citation

  • Hans Degryse & Yalin Gündüz & Kuchulain O'Flynn & Steven Ongena, 2020. "Identifying Empty Creditors with a Shock and Micro-Data," Swiss Finance Institute Research Paper Series 20-15, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2015
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Empty creditors; default; bankruptcy; credit default swaps; micro-data;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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