Governance Mechanisms and Bond Prices
University of Notre Dame
Vinay B. Nair
University of Pennsylvania - Finance Department
Chenyang (Jason) Wei
Federal Reserve Banks - Federal Reserve Bank of Philadelphia
Yale ICF Working Paper No. 06-30
NYU, Law and Economics Research Paper No. 04-007
7th Annual Texas Finance Festival Paper
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.
Number of Pages in PDF File: 56
Keywords: corporate governance, takeovers, shareholder controlsworking papers series
Date posted: October 12, 2004
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