Do Credit Default Swaps Matter After They Are Settled? Evidence from Debt Recovery Rates

48 Pages Posted: 30 Aug 2014 Last revised: 24 Aug 2022

See all articles by Min Qi

Min Qi

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Deming Wu

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: January 12, 2016

Abstract

We provide the first empirical analysis on the effects of credit default swaps (CDS) on corporate distress resolution with a focus on debt recovery rate. CDS contracts are settled shortly after the occurrence of credit events such as restructuring or bankruptcy filings and, presumably, should cease to be relevant after the settlements. However, we find that the ultimate debt recovery rates, which are determined in the final resolution plan and long after the CDS settlements, are higher for the bankrupt firms with CDS contracts before bankruptcy filings. This CDS effect on recovery rates is more pronounced for bonds than for loans. The overall evidence is consistent with the view that CDS trigger earlier bankruptcy filings, leaving more valuable assets for bondholders in the bankrupt entities.

Keywords: Credit default swaps (CDS), Recovery rate, Loss given default (LGD), Credit risk

JEL Classification: G33, G34, G32, G30, G10

Suggested Citation

Qi, Min and Tang, Dragon Yongjun and Wu, Deming and Yan, Hong, Do Credit Default Swaps Matter After They Are Settled? Evidence from Debt Recovery Rates (January 12, 2016). Available at SSRN: https://ssrn.com/abstract=2488637 or http://dx.doi.org/10.2139/ssrn.2488637

Min Qi

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

Deming Wu (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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