How does credit risk affect cost management strategies? Evidence on the initiation of credit default swap and sticky cost behavior
How does credit risk affect cost management strategies? Evidence on the initiation of credit default swap and sticky cost behavior
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DOI：
10.1016/j.jcorpfin.2023.102401
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发表时间：
2023
期刊：
影响因子：
--
通讯作者：
Yan Yan
中科院分区：
文献类型：
--
作者：
Jing Dai;Rong Huang;Yan Yan
In this paper, we examine the effect of credit defaults swaps (CDS) initiation on reference firms' .cost management strategies. CDS contracts provide insurance protection for creditors, inducing a .shift in bargaining power from borrowers to creditors and an excessive incidence of bankruptcy. .Anticipating more intransigent creditors in debt renegotiations and higher bankruptcy risk, CDS .firms are incentivized to mitigate risk through decreasing cost stickiness after CDS initiation, as .cost stickiness lowers liquidity and triggers early covenant violations. We find that, on average, .CDS initiation is associated with a decline in reference firms' cost stickiness. This association is .more pronounced for less liquid, financially distressed, and lower credit quality firms. We also .find that CDS firms with a reduction in cost stickiness will exhibit lower future bankruptcy risk .than CDS firms without such as reduction in stickiness. Collectively, our findings suggest that the .CDS-induced “empty creditor problem” causes reference firms to undertake more conservative .cost management practices to alleviate downside risk.
