Incentives of CLO Managers in Screening and Monitoring: Evidence from Chapter 11 Bankruptcies
Shohini Kundu, Finance PhD student
The purpose of this paper is to study the incentives of CLO managers in screening and monitoring loans that are subsequently securitized and sold to investors. I will use bankruptcy as a quasinatural experiment to study (1) whether CLO managers opt to intervene in the reorganization and restructuring process following Chapter 11 filing, and if so, (2) the effect of such intervention on both bankruptcy outcomes and syndicated leveraged loan terms. If CLO managers do not intervene in the bankruptcy process, it suggests that managers primarily screen firms and do not monitor their investments. If they intervene, it suggests that managers monitor firms in addition to screening. Investigation of this objective can contribute to our (limited) knowledge of CLO managerial incentives and the factors that shape them such as regulation, compensation structure, etc. This project also has policy implications for understanding how to induce alignment in interests between CLO managers and end investors - a relevant concern since the GFC.