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| I study the relation between internal governance and creditor governance. A deterioration in creditor governance may increase the agency costs of debt and managerial opportunism at the expense of shareholders. I exploit the introduction of credit default swaps (CDS) as a negative shock to creditor governance. I provide evidence consistent with shareholders pushing for a substitution effect between internal governance and creditor governance. Following CDS introduction CDS firms reduce managerial risk-taking incentives relative to other firms. At the same time after the start of CDS trading CDS firms increase managerial wealth-performance sensitivity board independence and CEO turnover performance-sensitivity relative to other firms. |
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