The Impact of Creditor Control on Corporate Bond Pricing and Liquidity
London Business School
Edith S. Hotchkiss
Boston College - Carroll School of Management
Boston College - Department of Finance
May 16, 2014
This paper analyzes the impact of the shift of control rights from shareholders to creditors as firm credit quality declines on corporate bond pricing and liquidity. 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 non-voting synthetic bond that is constructed using CDS contracts. Empirically, we find this premium increases around important credit events such as defaults, bankruptcies, and covenant violations, and is greatest in cases where the value of control is expected to be highest. We also show that bond and CDS liquidity changes do not appear to drive increases in the premium.
Number of Pages in PDF File: 53
Keywords: Creditor control, Credit default swap (CDS), Distress, Default, Bankruptcy, Covenant violation, Liquidity, Corporate bonds
JEL Classification: G13, G33, G34working papers series
Date posted: March 7, 2014 ; Last revised: May 17, 2014
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