Oğuzhan Karakaş is an Assistant Professor of Finance at Boston College. This post is based on an article authored by Professor Karakaş; Peter Feldhütter, Assistant Professor of Finance at London Business School; and Edith Hotchkiss, Associate Professor of Finance at Boston College.
In our article, The Value of Creditor Control in Corporate Bonds, recently published in the Journal of Financial Economics, we introduce a measure that captures the premium in bond prices that is due to the value of creditor control. We estimate the premium as the difference in the bond price and an equivalent synthetic bond without control rights that is constructed using credit default swaps (CDS) contracts. The main insight for the methodology is that CDS prices reflect the cash flows of the underlying bonds, but not the control rights. The premium we introduce captures the marginal value of control in a bond until the bond matures or—in the case of a payment default or bankruptcy—until the CDS contracts for that issuer settle, and hence is a lower bound for the control premium.