The Value of Creditor Control in Corporate Bonds
London Business School
Edith S. Hotchkiss
Boston College - Carroll School of Management
Boston College - Department of Finance
September 7, 2015
Journal of Financial Economics (JFE), Volume 121, Issue 1, pp. 1-27, July 2016
This paper introduces 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 CDS contracts. Empirically, we find this premium increases as firm credit quality decreases and around important credit events such as defaults, bankruptcies, and covenant violations; the increase is greatest for bonds most pivotal to changes in control. Changes in bond and CDS liquidity do not appear to drive increases in the premium.
Number of Pages in PDF File: 62
Keywords: Creditor control, Credit default swap (CDS), Distress, Default, Bankruptcy, Covenant violation, Liquidity, Corporate bonds
JEL Classification: G13, G33, G34
Date posted: March 7, 2014 ; Last revised: June 1, 2016
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