Does Corporate Governance Matter to Bondholders?
Penn State Law
Virginia Polytechnic Institute & State University
William F. Maxwell
SMU - Cox School
Journal of Financial and Quantitative Analysis, Forthcoming
We examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990 through 2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with strongest management rights (strongest antitakeover provisions) and firms with strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about thirty-four basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.
Keywords: Agency cost, antitakeover provisions, corporate governance, debt, takeover defenses
JEL Classification: G32, G34Accepted Paper Series
Date posted: September 14, 2004
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