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

Dan Amiram, William H. Beaver, Wayne R. Landsman, Jianxin Zhao

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)364-382
Number of pages19
JournalJournal of Financial Economics
Volume126
Issue number2
DOIs
StatePublished - Nov 2017
Externally publishedYes

Keywords

  • Adverse selection
  • CDS
  • Information asymmetry
  • Moral hazard
  • Syndicated loans

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