The Value of Creditor Control in Corporate Bonds

Peter Feldhütter

London Business School

Edith S. Hotchkiss

Boston College - Carroll School of Management

Oğuzhan Karakaş

Boston College - Department of Finance

November 10, 2014

This paper analyzes the impact on corporate bond pricing of the shift of control rights from shareholders to creditors as firm credit quality declines. Specifically, we propose a new measure to demonstrate the premium in bond prices that is related to creditor control. The main insight for our methodology is that credit default swap (CDS) prices reflect the cash flows of the underlying bonds, but not the control rights. We estimate the premium in bond prices 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: 64

Keywords: Creditor control, Credit default swap (CDS), Distress, Default, Bankruptcy, Covenant violation, Liquidity, Corporate bonds

JEL Classification: G13, G33, G34

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Date posted: March 7, 2014 ; Last revised: November 12, 2014

Suggested Citation

Feldhütter, Peter and Hotchkiss, Edith S. and Karakaş, Oğuzhan, The Value of Creditor Control in Corporate Bonds (November 10, 2014). Available at SSRN: http://ssrn.com/abstract=2405036 or http://dx.doi.org/10.2139/ssrn.2405036

Contact Information

Peter Feldhütter (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
Edith S. Hotchkiss
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)
Oğuzhan Karakaş
Boston College - Department of Finance ( email )
Carroll School of Management
Fulton Hall 334, 140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
+1-617-552-1175 (Phone)
+1-617-552-0431 (Fax)
HOME PAGE: http://www2.bc.edu/~karakas/
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