Credit default swaps and market information

Abstract

In this paper, I theoretically explore the effects of the interaction between the information transmission role and the empty creditor problem of credit default swaps (CDSs) under debt rollover. Contrary to the empty creditor argument, the introduction of CDS protection increases the possibility of out-of-court restructuring if the liquidation value is not sufficiently large. However, when it is large, the introduction of CDS protection increases the possibility of firm bankruptcy. In addition, the introduction of CDS markets impairs the efficiency of debt financing under certain conditions, particularly if the liquidation value is not sufficiently large.