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Governance Mechanisms and Bond Prices
Martijn Cremers Yale School of Management Vinay B. Nair University of Pennsylvania - Finance Department Chenyang (Jason) Wei Federal Reserve Bank of New York October 2006 Yale ICF Working Paper No. 06-30 NYU, Law and Economics Research Paper No. 04-007 7th Annual Texas Finance Festival Paper Abstract: We investigate the effects of shareholder governance mechanisms on bondholders and document two new findings. First, the impact of shareholder control (proxied by large institutional blockholders) on credit risk depends on takeover vulnerability. Shareholder control is associated with higher (lower) yields if the firm is exposed to (protected from)takeovers. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 66 basis points. Second, event risk covenants reduce the credit risk associated with strong shareholder governance. Therefore, without bond covenants, shareholder governance and bondholder interests diverge.
Keywords: corporate governance, takeovers, shareholder controls Working Paper SeriesDate posted: October 12, 2004 ; Last revised: November 15, 2006Suggested CitationContact Information
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