We document an increase in cases where credit default swap (CDS) investors intervene in the restructuring of a distressed firm. In our theoretical analysis, we show that—contrary to popular belief—intervention by CDS investors is not necessarily reducing firm value. While the equilibrium CDS...

We examine the effect of introducing credit default swaps (CDSs) on firm value. Our model allows for dynamic investment and financing, and bondholders can trade in the CDS market. The model incorporates both negative and positive effects of CDSs. CDS markets lead to more liquidations, but they...