Stefano Colonnello, Swiss Finance Institute and École Polytechnique Fédérale de Lausanne
I examine whether the availability of credit default swaps (CDS) has consequences for creditor governance. CDSs offer creditors the opportunity to hedge credit risk and may impact their willingness to renegotiate debt agreements after covenant violations and to monitor firms. I show that firms implement more conservative investment and financing policies after covenant violations if CDSs are traded on their debt, consistently with heightened renegotiation frictions. Moreover, firms with traded CDS contracts exhibit significantly worse operating and stock performance after covenant violations. Overall, these findings point to an exacerbation of debt-equity conflicts due to the availability of CDSs. Finally, I analyse the interaction of creditor governance and internal governance, and provide evidence suggesting that the possibility to hedge risk through CDSs also reduces creditors’ incentives to monitor firms.
Stefano Colonnello is a PhD candidate in Finance at the Swiss Finance Institute and École Polytechnique Fédérale de Lausanne. He obtained his MSc in Finance from Bocconi University. His main research interests are in empirical corporate finance, corporate governance, financial institutions, and law and finance.