The role of credit default swaps in determining corporate payout policy. Issue 2 (18th October 2021)

• Record Type: Journal Article
• Authors: Lee, Hwang Hee; Oh, Frederick Dongchuhl
• Is Part Of: Financial management. Volume 51:Issue 2(2022)
• Page Start: 635
• Page End: 661
• Publication Date: 2021-10-18
• Subjects: bank debt dependency -- credit default swap -- creditor monitoring -- dividend -- empty creditor -- institutional ownership -- payout policy -- stock repurchase; Corporations -- Finance -- Periodicals; 658.1505
• DOI: 10.1111/fima.12381
• Languages: English
• ISSNs: 0046-3892

Abstract

Abstract: We examine how the introduction of credit default swap (CDS) trading on the debt of individual firms affects corporate payout policy. We find that firms increase payouts to shareholders after the introduction of CDS trading on their debt. This suggests that CDS‐referenced firms are more likely to be affected by decreased creditor monitoring than by tougher CDS‐insured creditors when determining total payout amount. Moreover, the increase in payouts after CDS introduction is more pronounced in firms with smaller institutional ownership and greater bank debt dependency. Finally, we show that CDS‐referenced firms tend to prefer stock repurchases that have a financial flexibility advantage over dividends to protect against the potential threat of tougher CDS‐insured creditors.