CDS, CEO compensation, and firm value

We study the initiation effect of credit default swaps on CEOs performance-sensitive compensation and shareholder value. We find that the initiation effect of CDS contracts on CEO's delta varies by the characteristics of firms. Firms with higher R&D and intangibles reduce CEO's delta whereas firms with higher CAPX intensity increase it. Moreover, shareholder value with high CAPX intensity increases with the initiation of CDS contracts but deteriorates in firms with high R&D intensity or intangible assets. Overall, our findings support the empty creditor hypothesis and show that firms use this opportunity to alter other governance mechanisms to maximize their value.