Creditor Control Rights and the Non-Synchronicity of Global Corporate CDS Excess Returns

Abstract

This paper traces non-synchronicity of corporate credit default swap (CDS) spreads in a multi-factor international asset pricing setting. Evidence portrays a significant role of country-level creditor control rights (CR) inversely affecting CDS non-synchronicity and thereby firm-specific information production. This could reflect a weakened monitoring incentive by creditors or debtors strategically disclosing information to avoid creditors’ intervention. This “dark side” of CR are concentrated in firms with a high level of firm risk, investment intensity, and information opacity. Additionally, local cultural attitudes, e.g., trust and uncertainty tolerance, intensify the adverse effects of CR. A difference-in-difference analysis shows that exogenous pro-creditor reforms lead to an economically sizeable decline in CDS non-synchronicity, confirming the cross-country evidence.

Keywords: Creditor Control Rights, Credit Default Swap, Non-Synchronicity

JEL Classification: G14, G15, G33