CDS trading and nonrelationship lending dynamics
- PDF / 596,736 Bytes
- 35 Pages / 439.37 x 666.142 pts Page_size
- 84 Downloads / 190 Views
CDS trading and nonrelationship lending dynamics Jung Koo Kang 1 & Christopher D. Williams 2 & Regina Wittenberg-Moerman 1 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We investigate how credit default swaps (CDSs) affect lenders’ incentives to initiate new lending relationships. We predict that CDSs reduce adverse selection that nonrelationship lead arrangers face when competing for loans. Consistently, we find that a loan is more likely to be syndicated by a nonrelationship lead arranger following CDS trading initiation on a borrower’s debt. We also show that borrowers that obtain loans from nonrelationship lead arrangers in the post-CDS trading initiation period are more opaque, in line with the effect of CDSs being more pronounced for borrowers for which adverse selection costs are higher. Further analyses show that, relative to relationship lead arrangers, nonrelationship lead arrangers have lower monitoring incentives in the post-period, as reflected by less restrictive covenants and performance pricing provisions they impose and by the reduced loan shares they retain. Moreover, we find that borrowers of nonrelationship lead arrangers following CDS trading initiation have higher growth opportunities and more volatile operations, consistent with such borrowers benefiting more from weaker restrictions on their activities imposed by lenders. Lastly, lower monitoring incentives of CDS-protected nonrelationship lead arrangers also decrease the propensity of inexperienced participants to join their syndicates. Overall, our findings suggest that CDS trading significantly changes nonrelationship lending dynamics. Keywords Credit default swaps . CDS market . Non-relationship lending . Debt contracts . Adverse selection . Lender monitoring . Cross-selling
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11142-02009562-9) contains supplementary material, which is available to authorized users.
* Regina Wittenberg-Moerman [email protected] Jung Koo Kang [email protected] Christopher D. Williams [email protected] Extended author information available on the last page of the article
J. Kang et al.
JEL classifications G20 . G21 . G32 . M40 . M41
1 Introduction The development of the credit default swap (CDS) market is one of the most important financial innovations of recent decades. CDSs allow lenders to hedge borrowers’ credit risk while maintaining their lending relationships (e.g., Saretto and Tookes 2013). However, CDS hedging reduces lenders’ incentives to monitor borrowers and may push borrowers into inefficient bankruptcy (e.g., Hu and Black 2008; Ashcraft and Santos 2009; Bolton and Oehmke 2011; Parlour and Winton 2013). Considering these positive and negative attributes, we examine how CDSs influence nonrelationship lending dynamics in the syndicated loan market. We focus on lead arrangers of loan syndications, as these lenders establish the relationship with the borrower, negotiate the loan contract, and perform
Data Loading...
